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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act
of 1934



|                                            |  |                               
|------------------------------------------- |  | ------------------------------
|For the fiscal year ended December 31, 2004 |  | Commission File Number 1-12875



CORNERSTONE REALTY
INCOME TRUST, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Virginia                                                       |  | 54-1589139                             
|(State or other jurisdiction of incorporation or organization) |  | I.R.S. Employer (Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|306 East Main Street, Richmond, VA       |  | 23219     
|(Address of principal executive offices) |  | (Zip Code)



(804) 643-1761

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:



|                            |  |                                          
|--------------------------- |  | -----------------------------------------
|Title of Each Class         |  | Name of Each Exchange on Which Registered
|Common Shares, no par value |  | New York Stock Exchange                  



Securities
registered pursuant to Section 12(g) of the Act:



Common
Shares, no par value



Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.  Yes  x  No ̈



Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x  No ̈



Based on the closing sales price of June 30, 2004, the aggregate market value of the voting common equity held by
non-affiliates of the registrant on such date was $491,760,350.*



On March 1, 2005, there were 56,394,008 shares of the registrants common shares outstanding.



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|* |  | In determining this figure, the company has assumed that all of its executive officers and directors, and persons known to the company to be beneficial owners of more than 5% of the
companys common shares, are affiliates. Such assumptions should not be deemed conclusive for any other purpose.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE



The portions of the registrants Proxy Statement for its 2005 Annual Meeting of Shareholders referred to in Part III.



TABLE OF CONTENTS



|          |  |                                                                                                |  |            
|--------- |  | ---------------------------------------------------------------------------------------------- |  | -----------
|          |  |                                                                                                |  | Page Number
|PART I.   |  |                                                                                                |  |            
|         
|Item 1.   |  | Business                                                                                       |  | 3          
|         
|Item 2.   |  | Properties                                                                                     |  | 10         
|         
|Item 3.   |  | Legal Proceedings                                                                              |  | 16         
|         
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                            |  | 16         
|         
|PART II.  |  |                                                                                                |  |            
|         
|Item 5.   |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 16         
|         
|Item 6.   |  | Selected Financial Data                                                                        |  | 17         
|         
|Item 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 19         
|         
|Item 7A.  |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 34         
|         
|Item 8.   |  | Financial Statements and Supplementary Data                                                    |  | 34         
|         
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 34         
|         
|Item 9A.  |  | Controls and Procedures                                                                        |  | 34         
|         
|Item 9B.  |  | Other Information                                                                              |  | 34         
|         
|PART III. |  |                                                                                                |  |            
|         
|Item 10.  |  | Directors and Executive Officers of the Registrant                                             |  | 35         
|         
|Item 11.  |  | Executive Compensation                                                                         |  | 35         
|         
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 35         
|         
|Item 13.  |  | Certain Relationships and Related Transactions                                                 |  | 35         
|         
|Item 14.  |  | Principal Accountant Fees and Services                                                         |  | 35         
|         
|PART IV.  |  |                                                                                                |  |            
|         
|Item 15.  |  | Exhibits and Financial Statement Schedules                                                     |  | 36         
|         



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PART I



Introduction



This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements concerning anticipated improvements in financial operations from completed and planned property renovations. Such statements involve
known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to be materially different from the results of operations or plans expressed or implied by such forward-looking
statements. Such factors include, among other things, unanticipated adverse business developments affecting the company or the apartment communities, as the case may be, adverse changes in the real estate markets and general and local economies and
business conditions adverse changes with respect to the availability and terms of debt financing and a reduction in the portion of dividends that are reinvested through the companys dividend reinvestment plan. In addition, the companys
continued qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code. Further in addition, the timing and level of distributions to shareholders are within the
discretion of the companys board of directors. Although the company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be
no assurance that such statements included in this annual report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be
regarded as a representation by the company or any other person that the results or conditions described in such statements or the objectives and plans of the company will be achieved. Readers should carefully review the companys financial
statements and the notes thereto.



Item 1.Business



General



Cornerstone
Realty Income Trust, Inc. (together with its subsidiaries, referred to below as the company or as we, us or our) is a self-administered real estate investment trust, or REIT, that is headquartered in
Richmond, Virginia, and that owns, acquires, develops and manages apartment communities located in the southern United States. The company is a Virginia corporation formed in August 1989. Initial capitalization occurred on August 18, 1992.
Operations of rental properties commenced on June 1, 1993. As of December 31, 2004, the company owned 87 apartment communities with 22,981 apartment homes, a third party property management business, apartment land under development and ownership in
four real estate joint ventures. The companys apartment communities are located in Georgia, North Carolina, South Carolina, Texas and Virginia. The companys apartment communities are described in Item 2 of this report, which is hereby
incorporated herein by reference.



At December 31, 2004, the
company had three divisions (Northern, Southern and Texas). The Northern division has 41 communities, the Southern division has 17 communities, and the Texas division has 29 communities. As of December 31, 2004, the company had approximately 688
employees, including specialists in acquisition, management, marketing, leasing, development, accounting and information systems.



Acquisition by Colonial Properties Trust



On October 25, 2004, the company entered into an Agreement and Plan of Merger (the Merger Agreement) with Colonial Properties Trust
(Colonial) and CLNL Acquisition Sub LLC under which the company will merge with and into CLNL Acquisition Sub LLC. There are a number of conditions that must occur for the merger to close. These conditions include the approval of the
Merger Agreement by the shareholders of both the company and Colonial and the receipt of necessary consents. See Item 7. Managements Discussion of Financial Conditions and Results of Operations of this report for further detail.



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Operations Management and Segments



A site manager is in charge of each of the companys apartment communities. These site managers report to a regional
manager who in turn reports to a divisional manager. The companys three divisional managers report to the companys Chief Operating Officer who in turn reports to the companys President, whom the company considers to be its Chief
Operating Decision Maker (CODM). The CODM separately evaluates each apartment communitys operating results and budgets on a monthly basis with the respective site manager, regional manager and divisional manager. As a result of
these meetings, changes in marketing strategy, capital allocation and other operating decisions are made. While each site manager, regional manager and divisional manager is empowered to make day to day decisions, the CODM ultimately determines the
allocation of resources for each individual apartment community through the companys budgeting process, which is developed on an annual basis and updated each month as needed.



The company believes that each apartment community should be viewed as a separate operating segment and that the segments
have similar economic characteristics, facilities, services and tenants. Furthermore, the company believes that its apartment communities contain similar economic characteristics and achieve similar long-term financial performance.



Product TypeEssentially all of the companys real estate
is composed of apartment communities. Over 97% of the communities are garden style apartments located in suburban settings.



Type of CustomerThe average income of the companys tenants is within 85%-110% of the average income for the standard metropolitan area
in which the community is located.



Lease TermAll
of the companys apartment communities lease to their tenants under comparable lease terms, which the majority range from month-to-month to 12-month leases.



No one apartment community contributes 10% or more of the companys revenues, profits or assets. Accordingly, the
company believes aggregation of its apartment communities into one reporting segment is appropriate. The companys property management business is not material to its operations.



Objective



The companys objective is to increase distributable cash flow and common share value by:



| |  |  | increasing rental rates, maintaining high economic occupancy rates, reducing tenant turnover, making value-enhancing and income-producing capital improvements, and controlling
operating costs and capital expenditures at the apartment communities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquiring additional apartment communities at attractive prices that provide the opportunity to improve operating performance through the application of the companys
management, marketing, and renovation programs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Growth
through Management and Leasing Efforts



The company uses
property operating income (rental income less property operating expenses as defined below) as a measure to evaluate each apartment communitys performance, but property operating income should not be deemed to be an alternative to net income,
as determined in accordance with generally accepted accounting principles. In addition, the companys calculation of property operating income may not be comparable to similarly entitled measures reported by other companies. The company
maintains an intense focus on the operations of its apartment communities to generate consistent, sustained growth in property operating income, which it believes is the key to growing cash available for distribution to shareholders and increasing
shareholder value. The company believes that successful implementation of this strategy will allow it to continue to increase its property operating income from its apartment portfolio. Through renovation and enhanced property management of the
apartment communities, the company strives to increase cash flows, thereby adding value to the underlying real estate.



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The company seeks to increase property operating income through active property management, which
includes attempting to keep rental rates at or above market levels, maintaining high economic occupancy through tenant retention, creating a property identity, effectively marketing each apartment community, and controlling property operating
expenses at the property level. Property operating expenses include the following expense categories: property and maintenance, taxes and insurance and property management. These categories primarily consist of property taxes and insurance, repairs
and maintenance, utilities, payroll costs and advertising and marketing.



Management believes that tenant retention is critical to generating property operating income growth. Tenant retention maintains or increases economic occupancy and minimizes the costs associated with preparing
apartments for new occupants. The company employs one person at each apartment community who has a primary focus on tenant retention. The tenant retention specialists objective is to make tenants feel at home in the community through personal
attention, which includes organizing social functions and activities as well as responding promptly to any tenant problems that may arise in conjunction with the apartment or community. The companys philosophy is to market its apartment
communities continually to existing tenants in order to achieve a low turnover rate. The companys turnover rate was 69% for 2004 and 2003. The company believes that the turnover rate of its apartment communities is in line with the average
turnover rate for comparable apartment communities.



Purchase
discounts are sought at both the corporate level and locally in those areas where the company has a significant presence. All major contracts for goods and services are re-bid annually to ensure competitive pricing. The company has a preventive
maintenance program and the ability to perform work using in-house personnel, which helps the companys efforts to reduce property operating expenses at the apartment communities. For example, the maintenance manager at each property is
qualified to perform HVAC and plumbing work which otherwise would be contracted outside the company. In addition, the company passes through expenses to tenants by sub-metering of utilities as permitted by local and state regulations and charging a
flat fee for trash services in select markets.



Growth through Acquisitions,
Renovations and Expansion



The company also seeks to
generate growth in property operating income through acquisitions by: (a) acquiring under-performing assets at less than replacement cost; (b) correcting operational problems; (c) making selected renovations; (d) increasing economic occupancy; (e)
raising rental rates; (f) implementing cost controls; and (g) providing enhanced property and centralized management. In markets that it targets for acquisition opportunities, the company attempts to gain a significant local presence in order to
achieve operating efficiencies. In analyzing acquisition opportunities, the company considers acquisitions of property portfolios as well as individual properties.



The company analyzes specific criteria in connection with a proposed acquisition. These criteria include: (a) the market in
which a property is located and whether it has a diversified economy, stable employment base and increasing average household income; (b) the propertys current and projected cash flow and expected ability to increase property operating income;
(c) the condition and design of the property and whether the property can benefit from renovations; (d) historical and projected occupancy rates; (e) the geographic location in light of the companys diversification objectives; and (f) the
purchase price of the property as it relates to the cost of new construction.



If sufficient tenant demand exists and suitable land is available, the company may construct additional apartment homes on land adjacent to certain apartment communities. The company believes that its successful
experience with large-scale property renovation will also permit strategic and cost-effective property expansion. It is the companys policy either to construct additional apartment homes itself or acquire additional apartment homes on a
turn-key basis from a third party contractor.



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Acquisition of Merry Land Properties, Inc



On May 28, 2003, the company completed the acquisition of Merry Land
Properties, Inc. (Merry Land), which owned nine apartment communities in South Carolina and Georgia containing 1,966 apartment homes, interests in two real estate joint ventures, two parcels of undeveloped land that the company plans to
develop into additional apartment homes, and a third party property management business. The acquisition was structured as a merger of Merry Land into a wholly owned qualified REIT subsidiary of the company. The merger qualified as a tax-free
reorganization and was accounted for under the purchase method of accounting. The company used various valuation methods to allocate the purchase price between land, buildings and improvements, equipment, identified intangible assets of in-place
leases and debt assumed. The purchase price was $159.4 million,which includes the issuance of equity, assumption of debt and the fair value adjustment to debt, and direct costs of the acquisition. Under the terms of the merger agreement,
each Merry Land shareholder received 1.818 of the companys common shares and 0.220 of the companys Series B Convertible Preferred Shares. A total of 5.0 million common shares and 0.6 million of the companys Series B Convertible
Preferred Shares were issued as a result of the merger. The Series B Convertible Preferred Shares met the conversion conditions and were converted to common shares on October 1, 2003. In addition, the company assumed approximately $90.6 million of
Merry Lands debt with a fair value of $110.5 million at the date of assumption. No goodwill was recorded as a result of this transaction.



Development



The company has two development projects in progress, which were assumed with the Merry Land merger mentioned above. All development projects and related
carrying costs are capitalized. The costs of development projects include interest, real estate taxes, insurance and certain internal development and related overhead costs directly related to the apartment community under development or major
renovation. Interest is capitalized to development projects based upon the weighted average cumulative project costs for each period multiplied by the companys borrowing costs on its line of credit, expressed as a percentage. The internal
development and related overhead costs are capitalized to the development projects based upon the effort identifiable with such projects. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and
reflected on the balance sheet as real estate under development. The company ceases the capitalization of such costs as the apartment homes become substantially complete and available for occupancy.



Dispositions



On July 22, 2004, the company sold two of its apartment communities in
Columbia, SC to Sterling American Property LP for $16.4 million and retained a 10% limited partnership interest in the entity. The company will continue to manage these apartment communities under a standard fee management contract. In accordance
with generally accepted accounting principles, since the sale was to an unrelated buyer, collection of the sales price has occurred and the company will not be required to support the operations of the property or its related obligations to an
extent greater than its proportionate interest, the company has recognized the part of the profit (90%) proportionate to the outside interests in the buyer at the date of sale. The resulting gain for financial reporting purposes was approximately
$3.4 million. The company has not classified this sale as discontinued operations in the statement of operations since the company continues to hold a 10% interest in the entity that owns the underlying apartment communities.



Discontinued Operations



During the first quarter of 2003, the company closed on the sale of two
apartment communities containing a total of 395 apartment homes for a total of $15.9 million and recognized a gain of $1.9 million. As a result of the sales, the companys financial statements have been prepared with these two apartment
communities results of operations and the gain from sale isolated and shown as discontinued operations. All historical statements presented have been restated to conform to this presentation in accordance with Statement of
Financial Accounting Standards No. 144.



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Investment in Real Estate Joint Ventures



As of December 31, 2004, the company had interests in four real estate joint
ventures. Two of the joint ventures own apartment communities under development and the other two joint ventures own three apartment communities. The company manages three of these apartment communities. One of the apartment communities under
development is almost complete as of December 31, 2004 and the company manages the apartment units as they become ready for occupancy. The company does not control these assets and has accounted for its investments under the equity method of
accounting. The investments in the joint ventures are recorded at cost and subsequently adjusted for equity in net income (loss) and cash contributions and distributions.



Third Party Property Management



As of December 31, 2004, the company managed ten apartment communities with 2,242 apartment homes owned by third parties.
For the year ended December 31, 2004 and 2003, the company recognized $0.7 million and $0.3 million, respectively, in third party property management income. Since the company is the primary obligor, has supplier discretion and bears credit risk for
third party expenses, the company in 2004 recorded reimbursement revenue and expenses for out-of-pocket expenses, totaling $1.9 million. Reimbursement revenue is recorded when the underlying reimbursable costs are incurred.



Operating Partnership



Effective October 1, 2001, State Street, LLC and State Street I, LLC, each a North Carolina limited liability company
(collectively, the Limited Partners), and the company, as the sole general partner, formed Cornerstone NC Operating Limited Partnership, a Virginia limited partnership (the Limited Partnership). The company has approximately
an 85% interest in the Limited Partnership. The Limited Partners are minority limited partners and are not otherwise related to the company. The Limited Partners contributed and agreed to contribute property to the Limited Partnership in exchange
for preferred and non-preferred operating partnership units. Beginning October 1, 2002, the Limited Partners became able to elect to redeem a portion of the preferred operating partnership units. If the Limited Partners make the election, the
company, at its option, will convert the preferred operating partnership units into either common shares of the company on a one-for-one basis or cash in an amount per unit equal to the closing price of a common share of the company on the exercise
date (or other specified price if there is no closing price on that date), subject to anti-dilution adjustments.



On March 30, 2004, the Limited Partnership acquired an apartment community with 138 apartment homes for a purchase price of $10.9 million. The total
consideration for the transaction includes the assumption of $10.0 million in secured financing, the issuance of 20,000 non-preferred operating partnership units, totaling $0.2 million, and cash payments totaling $0.7 million. The non-preferred
operating partnership units converted into preferred operating partnership units on January 1, 2005.



During the first quarter of 2003, a total of 0.9 million preferred operating partnership units were converted into common shares on a one-to-one basis.
During 2003, 0.3 million non-preferred operating partnership units converted to preferred operating partnership units as certain lease-up and stabilization criteria were met. As of December 31, 2004, there were 1.8 million preferred operating
partnership units eligible for conversion into common shares on one-for-one basis or cash, at the companys option.



Financing Policy



The companys objective is to seek capital as needed at the lowest possible cost. In addition to obtaining capital from future sales of common
shares, the company may obtain capital from lines of credit or other secured or unsecured borrowings.



The following is a summary of the companys financing activities for the year ended December 31, 2004:



| |  |  | Financed $75.5 million in variable and fixed rate mortgage notes.
| | - |  | -----------------------------------------------------------------



| |  |  | Assumed $10.0 million in secured financing, and had advances on the construction loan of $3.4 million.
| | - |  | ------------------------------------------------------------------------------------------------------



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| |  |  | Paid $1.5 million in deferred financing costs associated with the above financings.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Repaid $67.3 million in variable and fixed rate mortgage notes using proceeds from the above financings.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Paid scheduled debt maturities in the amount of $4.7 million.
| | - |  | -------------------------------------------------------------



| |  |  | Net increase of $6.7 million on the companys $50 million secured revolving credit facility.
| | - |  | --------------------------------------------------------------------------------------------



In connection with the issuance of its variable rate debt, in order to limit its exposure to increases in interest rates,
the company paid approximately $0.7 million to enter into seven interest rate cap agreements which effectively cap the interest rate on approximately $75 million of the companys variable rate debt. The cap rates on these agreements range from
6.8% to 8.4% and have a weighted average rate of 7.7%. Maturities on these cap agreements range from August 2008 to February 2009. The fair value of these interest rate cap agreements was approximately $0.1 million at December 31, 2004 and is
included in other assets.



Tax Matters



The company is operated as, and annually elects to be taxed as, a real
estate investment trust under the Internal Revenue Code of 1986, as amended (the Code). Generally, a real estate investment trust that complies with the provisions of the Code and distributes at least 90% of its taxable income to its
shareholders does not pay federal income taxes on its distributed income. Accordingly, no provision has been made for federal income taxes. The company is subject to various state, local, excise and franchise taxes.



The company created a C-corporation which elected the taxable REIT subsidiary
(TRS) status for financing purposes for one apartment community. The TRS is subject to federal, state and local income taxes. For the years ended December 31, 2004 and 2003, the impact of this TRSs income taxes and related tax
attributes was not material to the accompanying consolidated financial statements.



During the course of the due diligence investigation and negotiations leading to the merger agreement with Colonial, several technical REIT qualification tax issues were identified. A closing agreement with the
Internal Revenue Service (IRS) or other mutually satisfactory resolution of these issues was one of the conditions to closing the proposed merger with Colonial. On January 25, 2005, the company signed a closing agreement with the IRS
resolving specified tax matters in connection with the companys investment in Cornerstone Acquisition Company, one of its subsidiaries, and resolving other tax matters. Under the closing agreement, the company paid $100,000 to the IRS. The
closing agreement also provides that the company will not be assessed any additional tax, interest or penalties, and does not require the company to pay dividends to any of its shareholders or make any other adjustments, in connection with the
resolution of the tax matters addressed by the closing agreement.



Additional Information on Policies With Respect to Investments and Certain Other Activities



This section sets forth certain additional information on the general policies of the company with respect to investments and various other activities. In
general, the companys board of directors may establish and change investment and other related policies without any shareholder approval. The provisions of the Internal Revenue Code applicable to real estate investment trusts impose various
restrictions on the nature of the investments and activities of the company, and it is the companys intention at all times fully to comply with these REIT tax requirements.



The company currently intends to invest solely in residential apartment communities and assets related to such communities
or otherwise related to the management and operation of such properties. The company is permitted to invest in other types of real estate, but has no present intention to do so. The companys geographical focus is in the areas described above.
The company may elect to acquire properties in other regions if that action is deemed consistent with the companys business objectives.



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The company seeks to acquire properties with a view to both current income and possible capital
appreciation. The company seeks to diversify its investment capital among numerous properties so as to avoid the allocation of any significant percentage of total investment to any single property or group of related properties.



The company has no specific limit on the amount of secured or unsecured debt
it may incur. As indicated, the company will seek capital as needed at the lowest possible cost, but also has a policy of maintaining debt at a prudent level in relation to total company capitalization and debt service requirements in relation to
its income.



As discussed above, the company may directly, or
through wholly-owned subsidiaries, own its properties wholly or may, in appropriate cases, acquire interests in joint ventures that own properties. The companys predominant method of financing acquisitions is with cash, which it may obtain
through borrowings, sales of its securities, dispositions of other properties, or through other means. However, in suitable situations, the company may use as consideration for property acquisitions its own securities (such as operating partnership
units of entities it forms, or its own common or preferred shares).



The company may invest its cash reserves in various types of short-term liquid investments, such as money market funds, prime commercial paper, certificates of deposit or U.S. government securities. The company expects that this temporary
investment of cash reserves will be limited to providing a return on cash held for other company purposes, such as property acquisitions and renovations, and does not reflect any intention to engage in the business of investing or trading in
securities. The company does not currently intend to invest in real estate mortgages.



The company, acting through its board of directors, is authorized to issue both common shares and preferred shares. In general, both common shares and preferred shares may be issued for such consideration as may be
determined by the board of directors without any need for authorization by holders of the common shares. The preferred shares can be issued in one or more series having varying voting rights, redemption and conversion features, distribution rights,
preferences, and such other rights, including rights of approval of specified transactions, as may be determined by the board of directors.



As discussed above, in analyzing acquisition opportunities, the company considers acquisitions of property portfolios as well as acquisitions of
individual properties. When appropriate, the company will consider the acquisition (by merger, share exchange or similar transaction) of other companies which own properties that are consistent with the companys investment objectives. As
appropriate, the company may also seek to provide additional property management services to properties owned by third parties and to receive property management fees for those services, subject to the REIT provisions of the Internal Revenue Code.



The company has no present intention of making loans to other
persons or underwriting the securities of other companies.



The
company has in the past repurchased its common shares in open-market transactions. The company currently has such a common share repurchase program in place and may, in the future, engage in the repurchase of its shares in open-market or other
transactions if the company deems such repurchase prudent and consistent with the overall operational objectives of the company.



The company provides additional information on its policies with respect to investments and related activities in both annual and quarterly reports to its
security holders, which also include financial statements of the company (and its consolidated subsidiaries) for the relevant periods.



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Internet Website



The address of the companys Internet website is www.cornerstonereit.com. The company makes available free of charge on or through its Internet
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after
the company electronically files such material with, or furnishes such material to, the SEC. In addition, the charters of the companys Audit Committee, Compensation Committee and Nominating and Governance Committee, as well as the
companys Code of Business Conduct and Ethics and its Corporate Governance Guidelines, are available on the companys Internet website. Copies of those documents are also available in print to any company shareholder who requests them. The
companys mailing address is 306 E. Main Street, Richmond, Virginia 23219, and the companys toll-free telephone number is (800) 582-8805.



|Item 2. | Properties
|------- | ----------



As of December 31, 2004, the company owned 87 apartment communities, which comprised a total of 22,981 apartment homes. Those apartment communities were
located in Georgia (11 communities), North Carolina (28 communities), South Carolina (7 communities), Texas (29 communities), and Virginia (12 communities).



The following table sets forth specific information regarding the companys apartment communities and their respective apartment homes:



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|                           |  |               |  |                |  |                   |  |                    |  |                          |            |                                 |   |                      |  |                                                 |  |                                           |         |  |      
|-------------------------- |  | ------------- |  | -------------- |  | ----------------- |  | ------------------ |  | ------------------------ | ---------- | ------------------------------- | - | -------------------- |  | ----------------------------------------------- |  | ----------------------------------------- | ------- |  | -----
|Property                   |  | Location      |  | Date of Const. |  | Date Acquired     |  | Encum- brances(13) |  | Initial Acquisition Cost |            | Total Investment at 12-31-04(1) |   | # of Apartment Homes |  | Total Investment Per Apartment Home at 12-31-04 |  | Average Apartment Home Size (Square Feet)
|Georgia                    |  |               |  |                |  |                   |  |                    |  |                          |            |                                 |   |                      |  |                                                 |  |                                           |         |  |      
|Ashley Run                 |  | Atlanta       |  | 1987           |  | April 30, 1997    |  | (11)               |  | $                        | 18,000,000 |                                 | $ | 23,048,174           |  | 348                                             |  | $                                         | 66,230  |  | 1,150
|Stone Brook                |  | Atlanta       |  | 1986           |  | October 31, 1997  |  | (11)               |  |                          | 7,850,000  |                                 |   | 10,287,816           |  | 188                                             |  |                                           | 54,722  |  | 937  
|Carlyle Club               |  | Atlanta       |  | 1974           |  | April 30, 1997    |  | 7,250,000          |  |                          | 11,580,000 |                                 |   | 15,141,791           |  | 243                                             |  |                                           | 62,312  |  | 1,089
|Dunwoody Springs           |  | Atlanta       |  | 1981           |  | July 25, 1997     |  | 13,325,000         |  |                          | 15,200,000 |                                 |   | 22,679,003           |  | 350                                             |  |                                           | 64,797  |  | 948  
|Poplar Place               |  | Atlanta       |  | 1989/1995      |  | September 7, 2001 |  | 19,585,929         |  |                          | 34,650,000 |                                 |   | 38,922,341           |  | 524                                             |  |                                           | 74,279  |  | 1,079
|Spring Lake                |  | Atlanta       |  | 1986           |  | August 12, 1998   |  | (11)               |  |                          | 9,000,000  |                                 |   | 10,884,521           |  | 188                                             |  |                                           | 57,896  |  | 1,009
|Greentree                  |  | Savannah      |  | 1984           |  | May 28, 2003      |  | 7,400,543          |  |                          | 10,966,046 |                                 |   | 11,410,643           |  | 194                                             |  |                                           | 58,818  |  | 852  
|Hammocks                   |  | Savannah      |  | 1997           |  | May 28, 2003      |  | 21,932,988         |  |                          | 25,392,449 |                                 |   | 25,922,314           |  | 308                                             |  |                                           | 84,163  |  | 1,051
|Huntington                 |  | Savannah      |  | 1986           |  | May 28, 2003      |  | 5,443,321          |  |                          | 8,291,199  |                                 |   | 8,497,403            |  | 147                                             |  |                                           | 57,805  |  | 813  
|Marsh Cove                 |  | Savannah      |  | 1983           |  | May 28, 2003      |  | 8,987,710          |  |                          | 11,897,003 |                                 |   | 12,723,999           |  | 188                                             |  |                                           | 67,681  |  | 1,053
|Merritt at Whitemarsh      |  | Savannah      |  | 2002           |  | May 28, 2003      |  | 22,983,741         |  |                          | 22,855,387 |                                 |   | 23,038,476           |  | 312                                             |  |                                           | 73,841  |  | 1,017
|                           |  |               |  |                |  |                   |  |                    | 
|North Carolina             |  |               |  |                |  |                   |  |                    |  |                          |            |                                 |   |                      |  |                                                 |  |                                           |         |  |      
|The Meadows                |  | Asheville     |  | (6)            |  | (6)               |  | 14,885,000         |  |                          | 17,836,000 |                                 |   | 19,941,497           |  | 392                                             |  |                                           | 50,871  |  | 1,033
|Beacon Hill                |  | Charlotte     |  | 1985           |  | May 1, 1996       |  | (12)               |  |                          | 13,579,203 |                                 |   | 17,029,511           |  | 349                                             |  |                                           | 48,795  |  | 734  
|Bridgetown Bay             |  | Charlotte     |  | 1986           |  | April 1, 1996     |  | (12)               |  |                          | 5,025,000  |                                 |   | 6,596,706            |  | 120                                             |  |                                           | 54,973  |  | 867  
|Charleston Place           |  | Charlotte     |  | 1986           |  | May 13, 1997      |  | (11)               |  |                          | 9,475,000  |                                 |   | 11,145,609           |  | 214                                             |  |                                           | 52,082  |  | 806  
|Greystone Crossing         |  | Charlotte     |  | 1998\2000      |  | May 8, 2000       |  | (12)               |  |                          | 26,800,000 |                                 |   | 28,271,116           |  | 408                                             |  |                                           | 69,292  |  | 927  
|Heatherwood                |  | Charlotte     |  | (3)            |  | (3)               |  | 16,250,000         |  |                          | 17,630,457 |                                 |   | 27,735,503           |  | 476                                             |  |                                           | 58,268  |  | 1,186
|Meadow Creek               |  | Charlotte     |  | 1984           |  | May 31, 1996      |  | 9,277,751          |  |                          | 11,100,000 |                                 |   | 14,100,189           |  | 250                                             |  |                                           | 56,401  |  | 860  
|Paces Glen                 |  | Charlotte     |  | 1986           |  | July 19, 1996     |  |                   |  |                          | 7,425,000  |                                 |   | 9,231,709            |  | 172                                             |  |                                           | 53,673  |  | 907  
|Legacy Park                |  | Charlotte     |  | 2001           |  | October 1, 2001   |  | 13,700,000         |  |                          | 21,888,522 |                                 |   | 22,112,207           |  | 288                                             |  |                                           | 76,778  |  | 1,004
|Timber Crest               |  | Charlotte     |  | 2000           |  | October 1, 2001   |  | 14,813,786         |  |                          | 19,076,149 |                                 |   | 19,556,751           |  | 282                                             |  |                                           | 69,350  |  | 983  
|Summerwalk                 |  | Charlotte     |  | 1983           |  | May 1, 1996       |  | 6,000,000          |  |                          | 5,660,000  |                                 |   | 8,313,003            |  | 160                                             |  |                                           | 51,956  |  | 963  
|Stone Point                |  | Charlotte     |  | 1986           |  | January 15, 1998  |  | (11)               |  |                          | 9,700,000  |                                 |   | 10,949,708           |  | 192                                             |  |                                           | 57,030  |  | 848  
|The Enclave at South Tryon |  | Charlotte     |  | 2002           |  | December 2, 2002  |  | (12)               |  |                          | 16,100,000 |                                 |   | 16,432,594           |  | 216                                             |  |                                           | 76,077  |  | 1,093
|Deerfield                  |  | Durham        |  | 1985           |  | November 1, 1996  |  | 9,887,239          |  |                          | 10,675,000 |                                 |   | 12,039,829           |  | 204                                             |  |                                           | 59,019  |  | 888  
|The Landing                |  | Durham        |  | 1984           |  | May 1, 1996       |  | 7,442,500          |  |                          | 8,345,000  |                                 |   | 11,050,227           |  | 200                                             |  |                                           | 55,251  |  | 960  
|Parkside at Woodlake       |  | Durham        |  | 1996           |  | August 31, 1996   |  | 11,000,000         |  |                          | 14,663,886 |                                 |   | 16,185,398           |  | 266                                             |  |                                           | 60,847  |  | 865  
|Highland Hills             |  | Carrboro      |  | 1987           |  | September 27,1996 |  | 14,360,566         |  |                          | 12,100,000 |                                 |   | 15,809,995           |  | 264                                             |  |                                           | 59,886  |  | 1,000
|Clarion Crossing           |  | Raleigh       |  | 1972           |  | September 30,1997 |  | 9,050,000          |  |                          | 14,225,488 |                                 |   | 15,313,624           |  | 260                                             |  |                                           | 58,899  |  | 803  
|Remington Place            |  | Raleigh       |  | 1985           |  | October 31, 1997  |  | (11)               |  |                          | 7,900,000  |                                 |   | 9,360,950            |  | 136                                             |  |                                           | 68,831  |  | 1,098
|St. Regis                  |  | Raleigh       |  | 1986           |  | October 31, 1997  |  | (11)               |  |                          | 9,800,000  |                                 |   | 11,483,151           |  | 180                                             |  |                                           | 63,795  |  | 840  
|The Trestles               |  | Raleigh       |  | 1987           |  | December 30,1994  |  | (11)               |  |                          | 10,350,000 |                                 |   | 12,382,068           |  | 280                                             |  |                                           | 44,222  |  | 776  
|The Timbers                |  | Raleigh       |  | 1983           |  | June 4, 1998      |  |                   |  |                          | 8,100,000  |                                 |   | 9,449,663            |  | 176                                             |  |                                           | 53,691  |  | 745  
|Trinity Commons            |  | Raleigh       |  | (9)            |  | (9)               |  | 27,555,398         |  |                          | 37,805,886 |                                 |   | 38,641,646           |  | 462                                             |  |                                           | 83,640  |  | 953  
|Glen Eagles                |  | Winston-Salem |  | (7)            |  | (7)               |  | 10,010,000         |  |                          | 16,887,653 |                                 |   | 19,099,497           |  | 310                                             |  |                                           | 61,611  |  | 978  
|Mill Creek                 |  | Winston-Salem |  | 1984           |  | September 1, 1995 |  | 6,207,500          |  |                          | 8,550,000  |                                 |   | 10,731,224           |  | 220                                             |  |                                           | 48,778  |  | 897  
|Pinnacle Ridge             |  | Asheville     |  | 1951           |  | April 1, 1998     |  | 4,842,038          |  |                          | 5,731,150  |                                 |   | 7,522,847            |  | 166                                             |  |                                           | 45,318  |  | 885  
|Autumn Park                |  | Greensboro    |  | (10)           |  | (10)              |  | 24,563,522         |  |                          | 31,028,621 |                                 |   | 31,221,008           |  | 402                                             |  |                                           | 77,664  |  | 983  
|St. Andrews                |  | Wilmington    |  | (8)            |  | (8)               |  | 18,044,701         |  |                          | 27,369,289 |                                 |   | 28,185,551           |  | 390                                             |  |                                           | 72,271  |  | 903  
|                           |  |               |  |                |  |                   |  |                    | 
|South Carolina             |  |               |  |                |  |                   |  |                    |  |                          |            |                                 |   |                      |  |                                                 |  |                                           |         |  |      
|Westchase                  |  | Charleston    |  | 1985           |  | January 15, 1997  |  | (11)               |  |                          | 11,000,000 |                                 |   | 14,567,297           |  | 352                                             |  |                                           | 41,384  |  | 706  
|Hampton Pointe             |  | Charleston    |  | 1986           |  | March 31, 1998    |  | (11)               |  |                          | 12,225,000 |                                 |   | 17,435,826           |  | 304                                             |  |                                           | 57,355  |  | 1,035
|Merritt at James Island    |  | Charleston    |  | 2002           |  | May 28, 2003      |  | 17,868,758         |  |                          | 24,844,213 |                                 |   | 24,933,261           |  | 230                                             |  |                                           | 108,405 |  | 1,026
|Quarterdeck                |  | Charleston    |  | 1987           |  | May 28, 2003      |  | 10,974,699         |  |                          | 15,824,658 |                                 |   | 16,086,330           |  | 230                                             |  |                                           | 69,941  |  | 813  
|Waters Edge                |  | Charleston    |  | 1985           |  | May 28, 2003      |  | 7,928,129          |  |                          | 10,360,565 |                                 |   | 10,732,303           |  | 204                                             |  |                                           | 52,609  |  | 918  
|Windsor Place              |  | Charleston    |  | 1985           |  | May 28, 2003      |  | 10,086,816         |  |                          | 14,045,021 |                                 |   | 14,356,123           |  | 224                                             |  |                                           | 64,090  |  | 953  
|Cape Landing               |  | Mytle Beach   |  | 1997/1998      |  | October 16, 1998  |  | 9,000,000          |  |                          | 17,100,000 |                                 |   | 19,939,818           |  | 288                                             |  |                                           | 69,235  |  | 933  



11



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##### Table of Contents

|                              |  |                 |  |                |  |                   |  |                    |             |                          |   |                                 |  |                     |               |                                                 |        |                                           |   |        |  |      
|----------------------------- |  | --------------- |  | -------------- |  | ----------------- |  | ------------------ | ----------- | ------------------------ | - | ------------------------------- |  | ------------------- | ------------- | ----------------------------------------------- | ------ | ----------------------------------------- | - | ------ |  | -----
|Property                      |  | Location        |  | Date of Const. |  | Date Acquired     |  | Encum- brances(13) |             | Initial Acquisition Cost |   | Total Investment at 12-31-04(1) |  | # of ApartmentHomes |               | Total Investment Per Apartment Home at 12-31-04 |        | Average Apartment Home Size (Square Feet)
|Virginia                      |  |                 |  |                |  |                   |  |                    |             |                          |   |                                 |  |                     |               |                                                 |        |                                           |   |        |  |      
|Trophy Chase                  |  | Charlottesville |  | (5)            |  | (5)               |  |                    | 15,000,000  |                          |   | 12,628,991                      |  |                     | 19,740,095    |                                                 | 425    |                                           |   | 46,447 |  | 803  
|Greenbrier                    |  | Fredericksburg  |  | 1980           |  | October 1, 1996   |  |                    | 12,392,366  |                          |   | 11,099,525                      |  |                     | 13,072,435    |                                                 | 258    |                                           |   | 50,668 |  | 851  
|Tradewinds                    |  | Hampton         |  | 1988           |  | November 1, 1995  |  |                    | 10,738,586  |                          |   | 10,200,000                      |  |                     | 12,751,470    |                                                 | 284    |                                           |   | 44,900 |  | 930  
|Ashley Park                   |  | Richmond        |  | 1988           |  | March 1, 1996     |  |                    | 9,500,000   |                          |   | 12,205,000                      |  |                     | 14,149,135    |                                                 | 272    |                                           |   | 52,019 |  | 765  
|Hampton Glen                  |  | Richmond        |  | 1986           |  | August 1, 1996    |  |                    | 12,253,292  |                          |   | 11,599,931                      |  |                     | 14,270,904    |                                                 | 232    |                                           |   | 61,513 |  | 788  
|Trolley Square                |  | Richmond        |  | (4)            |  | (4)               |  |                    | 9,500,000   |                          |   | 10,242,575                      |  |                     | 14,881,339    |                                                 | 328    |                                           |   | 45,370 |  | 589  
|The Gables                    |  | Richmond        |  | 1987           |  | July 2, 1998      |  |                    | 8,000,000   |                          |   | 11,500,000                      |  |                     | 13,671,020    |                                                 | 224    |                                           |   | 61,031 |  | 700  
|Chase Gayton                  |  | Richmond        |  | 1984           |  | June 21, 2001     |  |                    | 15,394,349  |                          |   | 21,175,000                      |  |                     | 22,821,972    |                                                 | 328    |                                           |   | 69,579 |  | 949  
|Waterford                     |  | Richmond        |  | 1989           |  | December 10, 2001 |  |                    | 16,390,582  |                          |   | 22,500,000                      |  |                     | 24,027,698    |                                                 | 312    |                                           |   | 77,012 |  | 995  
|Arbor Trace                   |  | VirginiaBeach   |  | 1985           |  | March 1, 1996     |  |                    | 5,000,000   |                          |   | 5,000,000                       |  |                     | 6,548,546     |                                                 | 148    |                                           |   | 44,247 |  | 850  
|Harbour Club                  |  | VirginiaBeach   |  | 1988           |  | May 1, 1994       |  |                    | 8,237,279   |                          |   | 5,250,000                       |  |                     | 7,729,647     |                                                 | 213    |                                           |   | 36,289 |  | 813  
|Mayflower Seaside             |  | VirginiaBeach   |  | 1950           |  | October 26, 1993  |  |                    | 10,500,000  |                          |   | 7,634,144                       |  |                     | 13,585,302    |                                                 | 265    |                                           |   | 51,265 |  | 698  
|                              |  |                 |  |                |  |                   |  |                    |            
|Texas                         |  |                 |  |                |  |                   |  |                    |             |                          |   |                                 |  |                     |               |                                                 |        |                                           |   |        |  |      
|Brookfield                    |  | Dallas          |  | 1984           |  | July 23, 1999     |  |                    | (12)        |                          |   | 8,014,533                       |  |                     | 8,224,497     |                                                 | 232    |                                           |   | 35,450 |  | 714  
|Toscana                       |  | Dallas          |  | 1986           |  | July 23, 1999     |  |                    | 5,250,000   |                          |   | 7,334,023                       |  |                     | 7,709,371     |                                                 | 192    |                                           |   | 40,153 |  | 601  
|Paces Cove                    |  | Dallas          |  | 1982           |  | July 23, 1999     |  |                    | 10,801,470  |                          |   | 11,712,879                      |  |                     | 12,892,291    |                                                 | 328    |                                           |   | 39,306 |  | 670  
|Timberglen                    |  | Dallas          |  | 1984           |  | July 23, 1999     |  |                    | 9,500,000   |                          |   | 13,220,605                      |  |                     | 14,647,000    |                                                 | 304    |                                           |   | 48,181 |  | 728  
|Summer Tree                   |  | Dallas          |  | 1980           |  | July 23, 1999     |  |                    | 7,532,615   |                          |   | 7,724,156                       |  |                     | 8,979,744     |                                                 | 232    |                                           |   | 38,706 |  | 575  
|Devonshire                    |  | Dallas          |  | 1978           |  | July 23, 1999     |  |                    | 3,461,912   |                          |   | 7,564,892                       |  |                     | 8,489,599     |                                                 | 144    |                                           |   | 58,956 |  | 876  
|The Courts on Pear Ridge      |  | Dallas          |  | 1988           |  | July 23, 1999     |  |                    | 10,278,374  |                          |   | 11,843,691                      |  |                     | 12,490,471    |                                                 | 242    |                                           |   | 51,614 |  | 774  
|Eagle Crest                   |  | Dallas          |  | 1983           |  | July 23, 1999     |  |                    | 15,000,000  |                          |   | 21,566,317                      |  |                     | 23,162,326    |                                                 | 484    |                                           |   | 47,856 |  | 887  
|Remington Hills               |  | Dallas          |  | 1984           |  | July 23, 1999     |  |                    | 14,250,000  |                          |   | 20,921,219                      |  |                     | 26,675,367    |                                                 | 362    |                                           |   | 73,689 |  | 957  
|Estrada Oaks                  |  | Dallas          |  | 1983           |  | July 23, 1999     |  |                    | 9,115,013   |                          |   | 10,786,882                      |  |                     | 11,738,548    |                                                 | 248    |                                           |   | 47,333 |  | 771  
|Aspen Hills                   |  | Dallas          |  | 1979           |  | July 23, 1999     |  |                    | (12)        |                          |   | 7,223,722                       |  |                     | 8,194,376     |                                                 | 240    |                                           |   | 34,143 |  | 671  
|Mill Crossing                 |  | Dallas          |  | 1979           |  | July 23, 1999     |  |                    |            |                          |   | 5,269,792                       |  |                     | 5,897,178     |                                                 | 184    |                                           |   | 32,050 |  | 691  
|Cottonwood                    |  | Dallas          |  | 1985           |  | July 23, 1999     |  |                    | 5,857,850   |                          |   | 6,271,756                       |  |                     | 7,717,290     |                                                 | 200    |                                           |   | 38,586 |  | 751  
|Burney Oaks                   |  | Dallas          |  | 1985           |  | July 23, 1999     |  |                    | 8,243,601   |                          |   | 9,965,236                       |  |                     | 11,155,719    |                                                 | 240    |                                           |   | 46,482 |  | 794  
|Copper Crossing               |  | Dallas          |  | 1980/1981      |  | July 23, 1999     |  |                    | (12)        |                          |   | 11,776,983                      |  |                     | 13,356,182    |                                                 | 400    |                                           |   | 33,390 |  | 739  
|The Arbors on Forest Ridge    |  | Dallas          |  | 1986           |  | July 23, 1999     |  |                    | 6,250,000   |                          |   | 9,573,954                       |  |                     | 10,324,884    |                                                 | 210    |                                           |   | 49,166 |  | 804  
|Park Village                  |  | Dallas          |  | 1983           |  | July 23, 1999     |  |                    | 8,261,577   |                          |   | 8,224,541                       |  |                     | 9,158,177     |                                                 | 238    |                                           |   | 38,480 |  | 647  
|Wildwood                      |  | Dallas          |  | 1984           |  | July 23, 1999     |  |                    | 3,289,296   |                          |   | 4,471,294                       |  |                     | 5,010,960     |                                                 | 120    |                                           |   | 41,758 |  | 755  
|Main Park                     |  | Dallas          |  | 1984           |  | July 23, 1999     |  |                    | 8,189,381   |                          |   | 9,082,967                       |  |                     | 9,834,673     |                                                 | 192    |                                           |   | 51,222 |  | 939  
|Paces Point                   |  | Dallas          |  | 1985           |  | July 23, 1999     |  |                    |            |                          |   | 12,980,245                      |  |                     | 14,134,608    |                                                 | 300    |                                           |   | 47,115 |  | 762  
|Silverbrook I                 |  | Dallas          |  | 1982           |  | July 23, 1999     |  |                    | 15,100,731  |                          |   | 15,709,893                      |  |                     | 18,401,409    |                                                 | 472    |                                           |   | 38,986 |  | 842  
|Silverbrook II                |  | Dallas          |  | 1984           |  | July 23, 1999     |  |                    | 2,771,525   |                          |   | 5,808,250                       |  |                     | 6,574,976     |                                                 | 170    |                                           |   | 38,676 |  | 741  
|Grayson I and II              |  | Dallas          |  | (2)            |  | (2)               |  |                    | 17,550,000  |                          |   | 22,159,080                      |  |                     | 25,403,749    |                                                 | 450    |                                           |   | 56,453 |  | 1,690
|Cutters Point                |  | Dallas          |  | 1978           |  | July 23, 1999     |  |                    | 6,250,000   |                          |   | 9,859,840                       |  |                     | 11,566,006    |                                                 | 196    |                                           |   | 59,010 |  | 1,010
|Windsor Heights               |  | Dallas          |  | 1997           |  | December 23, 2002 |  |                    | 25,266,500  |                          |   | 29,004,616                      |  |                     | 29,845,533    |                                                 | 396    |                                           |   | 75,368 |  | 1,167
|The Meridian                  |  | Austin          |  | 1988           |  | July 23, 1999     |  |                    | 5,460,000   |                          |   | 7,539,224                       |  |                     | 8,757,068     |                                                 | 200    |                                           |   | 43,785 |  | 741  
|Canyon Hills                  |  | Austin          |  | 1996           |  | July 23, 1999     |  |                    | 12,319,470  |                          |   | 12,512,502                      |  |                     | 13,027,568    |                                                 | 229    |                                           |   | 56,889 |  | 799  
|Sierra Ridge                  |  | San Antonio     |  | 1981           |  | July 23, 1999     |  |                    | 4,750,000   |                          |   | 6,624,666                       |  |                     | 8,760,901     |                                                 | 230    |                                           |   | 38,091 |  | 751  
|Real estate under development |  |                 |  |                |  |                   |  |                    |             |                          |   | 13,453,639                      |  |                     | 13,453,639    |                                                 |        |                                           |   |        |  |      
|                              |  |                 |  |                |  |                   |  |                    |             |                          |   |                                 |  |                     |               |                                                 |        |                                           |   |        |  |      
|                              |  |                 |  |                |  |                   |  | $                  | 822,081,404 |                          | $ | 1,155,145,408                   |  | $                   | 1,323,333,893 |                                                 | 22,981 |                                           | $ | 57,584 |  |      
|                              |  |                 |  |                |  |                   |  |                    |             |                          |   |                                 |  |                     |               |                                                 |        |                                           |   |        |  |      



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##### Table of Contents

Notes to table of apartment communities:



|(1) |  | Total Investment includes the purchase price of the apartment community plus real estate commissions, closing costs and improvements capitalized since the
communitys date of acquisition.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Grayson Square Apartments is comprised of Grayson Square I (completed in 1985) and Grayson Square II (completed in 1986) both acquired in July 1999 at a cost of $6.4 million and
$6.1 million. These are combined as one apartment community for financing purposes.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Heatherwood Apartments is comprised of Heatherwood (completed in 1980) and Italian Village and Villa Marina Apartments (completed in 1980) acquired in September 1996 and August
1997, respectively, at a cost of $10.2 million and $7.4 million. They are adjoining properties and are operated as one apartment community.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Trolley Square Apartments is comprised of Trolley Square East Apartments (completed in 1965) and Trolley Square West Apartments (completed in 1964) acquired in June 1996 and
December 1996, respectively, at a cost of $6.0 million and $4.2 million. They are adjacent properties and are operated as one apartment community.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Trophy Chase is comprised of Trophy Chase (completed in 1970) and Hunters Creek (completed in 1970) acquired in April 1996 and July 1999, respectively, at a cost of $3.7
million and $8.9 million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | The Meadows is comprised of The Meadows (completed in 1974), the Enclave (completed in 2000) and Phase II Enclave (completed in 2001) acquired in January 1996, March 2000 and May
2001, respectively, at a cost of $6.2 million, $8.8 million and $2.9 million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Glen Eagles is comprised of Glen Eagles (completed in 1990) and Prestwick (completed in 2000) acquired in October 1995 and September 2000, respectively, at a cost of $7.3 million
and $9.6 million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | St. Andrews is comprised of St. Andrews (completed in 1998) and St. Andrews II (completed in 2002) acquired in October 2001 and March 2002, respectively, at a cost of $17.1 million
and $10.3 million.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Trinity Commons is comprised of Trinity Commons (completed in 2000) and Trinity Commons II (completed in 2002) acquired in October 2001 and July 2002, respectively, at a cost of
$22.1 million and $15.7 million.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Autumn Park is comprised of Autumn Park (completed in 2001) and Autumn Park II (completed in 2004) acquired in October 2001 and March 2004, respectively, at a cost of $20.1 million
and $10.9 million.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | $73.5 million of secured debt secured by 10 properties which are individually noted.
|---- |  | ------------------------------------------------------------------------------------

|(12) |  | $20.3 million of secured debt secured by 7 properties which are individually noted.
|---- |  | -----------------------------------------------------------------------------------

|(13) |  | Includes fair value adjustments of $15.1 million.
|---- |  | -------------------------------------------------



13



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##### Table of Contents

The following table sets forth occupancy rates and average rental rates for the companys apartment
communities:



|                           |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |       |  |      |     |      |   |     |  |   |    
|-------------------------- |  | ------------------- | - |  | --------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | ----- | ---- | - | ----- |  | ---- | --- | ---- | - | --- |  | - | ---
|                           |  | Occupancy Rates (2) |   |  | December Average Rental Rates (3)
|Property (1)               |  | 2004                |   |  | 2003                              |   |  | 2002 |   |  | 2001 |   |  | 2000 |   |  | 2004 |       | 2003 |   | 2002  |  | 2001 |     | 2000
|Georgia                    |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |       |  |      |     |      |   |     |  |   |    
|Ashley Run                 |  | 68                  | % |  | 79                                | % |  | 82   | % |  | 88   | % |  | 92   | % |  | $    | 710   |      | $ | 713   |  | $    | 757 |      | $ | 817 |  | $ | 822
|Stone Brook                |  | 88                  | % |  | 77                                | % |  | 85   | % |  | 88   | % |  | 91   | % |  |      | 641   |      |   | 652   |  |      | 680 |      |   | 741 |  |   | 733
|Carlyle Club               |  | 86                  | % |  | 78                                | % |  | 86   | % |  | 88   | % |  | 92   | % |  |      | 699   |      |   | 703   |  |      | 763 |      |   | 783 |  |   | 802
|Dunwoody Springs           |  | 91                  | % |  | 88                                | % |  | 91   | % |  | 93   | % |  | 93   | % |  |      | 650   |      |   | 671   |  |      | 709 |      |   | 763 |  |   | 760
|Poplar Place               |  | 87                  | % |  | 87                                | % |  | 86   | % |  | 89   | % |  |     |   |  |      | 695   |      |   | 690   |  |      | 709 |      |   | 776 |  |   |   
|Spring Lake                |  | 91                  | % |  | 84                                | % |  | 88   | % |  | 90   | % |  | 91   | % |  |      | 674   |      |   | 657   |  |      | 705 |      |   | 745 |  |   | 728
|Greentree                  |  | 93                  | % |  | 92                                | % |  |     |   |  |     |   |  |     |   |  |      | 691   |      |   | 675   |  |      |    |      |   |    |  |   |   
|Hammocks                   |  | 94                  | % |  | 93                                | % |  |     |   |  |     |   |  |     |   |  |      | 876   |      |   | 852   |  |      |    |      |   |    |  |   |   
|Huntington                 |  | 95                  | % |  | 95                                | % |  |     |   |  |     |   |  |     |   |  |      | 718   |      |   | 706   |  |      |    |      |   |    |  |   |   
|Marsh Cove                 |  | 94                  | % |  | 93                                | % |  |     |   |  |     |   |  |     |   |  |      | 791   |      |   | 768   |  |      |    |      |   |    |  |   |   
|Merritt at Whitemarsh      |  | 83                  | % |  | 84                                | % |  |     |   |  |     |   |  |     |   |  |      | 931   |      |   | 939   |  |      |    |      |   |    |  |   |   
|                           |  |                     |   |  |                                   |   |  |      |   | 
|North Carolina             |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |       |  |      |     |      |   |     |  |   |    
|The Meadows                |  | 93                  | % |  | 92                                | % |  | 93   | % |  | 93   | % |  | 94   | % |  |      | 687   |      |   | 663   |  |      | 679 |      |   | 688 |  |   | 673
|Beacon Hill                |  | 85                  | % |  | 85                                | % |  | 87   | % |  | 90   | % |  | 91   | % |  |      | 546   |      |   | 572   |  |      | 567 |      |   | 623 |  |   | 632
|Bridgetown Bay             |  | 93                  | % |  | 79                                | % |  | 91   | % |  | 87   | % |  | 90   | % |  |      | 574   |      |   | 563   |  |      | 605 |      |   | 617 |  |   | 668
|Charleston Place           |  | 92                  | % |  | 85                                | % |  | 88   | % |  | 89   | % |  | 91   | % |  |      | 532   |      |   | 547   |  |      | 575 |      |   | 621 |  |   | 638
|Greystone Crossing         |  | 93                  | % |  | 79                                | % |  | 81   | % |  | 91   | % |  | 86   | % |  |      | 614   |      |   | 624   |  |      | 662 |      |   | 660 |  |   | 695
|Heatherwood                |  | 81                  | % |  | 81                                | % |  | 85   | % |  | 91   | % |  | 92   | % |  |      | 594   |      |   | 619   |  |      | 635 |      |   | 658 |  |   | 657
|Meadow Creek               |  | 84                  | % |  | 82                                | % |  | 79   | % |  | 89   | % |  | 88   | % |  |      | 545   |      |   | 552   |  |      | 591 |      |   | 620 |  |   | 652
|Paces Glen                 |  | 89                  | % |  | 79                                | % |  | 90   | % |  | 89   | % |  | 88   | % |  |      | 569   |      |   | 557   |  |      | 607 |      |   | 643 |  |   | 677
|Legacy Park                |  | 92                  | % |  | 89                                | % |  | 88   | % |  | 78   | % |  |     |   |  |      | 742   |      |   | 735   |  |      | 761 |      |   | 834 |  |   |   
|Timber Crest               |  | 91                  | % |  | 89                                | % |  | 85   | % |  | 85   | % |  |     |   |  |      | 666   |      |   | 685   |  |      | 673 |      |   | 763 |  |   |   
|Summerwalk                 |  | 91                  | % |  | 86                                | % |  | 89   | % |  | 89   | % |  | 94   | % |  |      | 608   |      |   | 600   |  |      | 615 |      |   | 646 |  |   | 668
|Stone Point                |  | 93                  | % |  | 88                                | % |  | 83   | % |  | 90   | % |  | 93   | % |  |      | 584   |      |   | 603   |  |      | 628 |      |   | 672 |  |   | 687
|The Enclave at South Tryon |  | 91                  | % |  | 74                                | % |  | 84   | % |  |     |   |  |     |   |  |      | 668   |      |   | 711   |  |      | 830 |      |   |    |  |   |   
|Deerfield                  |  | 92                  | % |  | 94                                | % |  | 93   | % |  | 95   | % |  | 94   | % |  |      | 724   |      |   | 725   |  |      | 787 |      |   | 812 |  |   | 793
|The Landing                |  | 87                  | % |  | 88                                | % |  | 88   | % |  | 96   | % |  | 94   | % |  |      | 640   |      |   | 645   |  |      | 649 |      |   | 714 |  |   | 697
|Parkside at Woodlake       |  | 88                  | % |  | 86                                | % |  | 87   | % |  | 91   | % |  | 93   | % |  |      | 669   |      |   | 667   |  |      | 697 |      |   | 732 |  |   | 732
|Highland Hills             |  | 83                  | % |  | 88                                | % |  | 92   | % |  | 96   | % |  | 95   | % |  |      | 780   |      |   | 809   |  |      | 837 |      |   | 869 |  |   | 842
|Clarion Crossing           |  | 87                  | % |  | 84                                | % |  | 86   | % |  | 92   | % |  | 92   | % |  |      | 615   |      |   | 617   |  |      | 652 |      |   | 591 |  |   | 592
|Remington Place            |  | 91                  | % |  | 90                                | % |  | 88   | % |  | 91   | % |  | 92   | % |  |      | 689   |      |   | 710   |  |      | 717 |      |   | 802 |  |   | 795
|St. Regis                  |  | 89                  | % |  | 86                                | % |  | 86   | % |  | 89   | % |  | 95   | % |  |      | 624   |      |   | 630   |  |      | 654 |      |   | 716 |  |   | 733
|The Trestles               |  | 89                  | % |  | 87                                | % |  | 89   | % |  | 86   | % |  | 90   | % |  |      | 552   |      |   | 560   |  |      | 595 |      |   | 620 |  |   | 621
|The Timbers                |  | 89                  | % |  | 87                                | % |  | 88   | % |  | 90   | % |  | 89   | % |  |      | 577   |      |   | 581   |  |      | 590 |      |   | 655 |  |   | 651
|Trinity Commons            |  | 89                  | % |  | 86                                | % |  | 74   | % |  | 90   | % |  |     |   |  |      | 712   |      |   | 727   |  |      | 778 |      |   | 822 |  |   |   
|Glen Eagles                |  | 83                  | % |  | 87                                | % |  | 86   | % |  | 87   | % |  | 87   | % |  |      | 669   |      |   | 656   |  |      | 647 |      |   | 671 |  |   | 701
|Mill Creek                 |  | 89                  | % |  | 88                                | % |  | 89   | % |  | 89   | % |  | 87   | % |  |      | 592   |      |   | 570   |  |      | 576 |      |   | 590 |  |   | 597
|Pinnacle Ridge             |  | 94                  | % |  | 94                                | % |  | 96   | % |  | 96   | % |  | 94   | % |  |      | 612   |      |   | 611   |  |      | 619 |      |   | 607 |  |   | 588
|Autumn Park                |  | 77                  | % |  | 86                                | % |  | 90   | % |  | 93   | % |  |     |   |  |      | 774   |      |   | 846   |  |      | 771 |      |   | 804 |  |   |   
|St. Andrews                |  | 91                  | % |  | 86                                | % |  | 81   | % |  | 94   | % |  |     |   |  |      | 684   |      |   | 668   |  |      | 690 |      |   | 685 |  |   |   
|                           |  |                     |   |  |                                   |   |  |      |   | 
|South Carolina             |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |       |  |      |     |      |   |     |  |   |    
|Westchase                  |  | 89                  | % |  | 92                                | % |  | 91   | % |  | 93   | % |  | 91   | % |  | $    | 611   |      |   | 608   |  |      | 591 |      |   | 599 |  |   | 594
|Hampton Pointe             |  | 89                  | % |  | 92                                | % |  | 89   | % |  | 86   | % |  | 92   | % |  |      | 728   |      |   | 699   |  |      | 678 |      |   | 699 |  |   | 701
|Merritt at James Island    |  | 91                  | % |  | 96                                | % |  |     |   |  |     |   |  |     |   |  |      | 1,078 |      |   | 1,037 |  |      |    |      |   |    |  |   |   
|Quarterdeck                |  | 97                  | % |  | 97                                | % |  |     |   |  |     |   |  |     |   |  |      | 791   |      |   | 763   |  |      |    |      |   |    |  |   |   
|Waters Edge                |  | 94                  | % |  | 98                                | % |  |     |   |  |     |   |  |     |   |  |      | 677   |      |   | 651   |  |      |    |      |   |    |  |   |   
|Windsor Place              |  | 92                  | % |  | 93                                | % |  |     |   |  |     |   |  |     |   |  |      | 673   |      |   | 646   |  |      |    |      |   |    |  |   |   
|Cape Landing               |  | 94                  | % |  | 92                                | % |  | 89   | % |  | 90   | % |  | 92   | % |  |      | 656   |      |   | 634   |  |      | 638 |      |   | 658 |  |   | 658
|                           |  |                     |   |  |                                   |   |  |      |   | 
|Virginia                   |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |      |       |      |   |       |  |      |     |      |   |     |  |   |    
|Trophy Chase               |  | 88                  | % |  | 90                                | % |  | 92   | % |  | 93   | % |  | 92   | % |  |      | 698   |      |   | 707   |  |      | 712 |      |   | 707 |  |   | 673
|Greenbrier                 |  | 97                  | % |  | 96                                | % |  | 95   | % |  | 98   | % |  | 97   | % |  |      | 872   |      |   | 838   |  |      | 821 |      |   | 771 |  |   | 719
|Tradewinds                 |  | 97                  | % |  | 94                                | % |  | 97   | % |  | 91   | % |  | 93   | % |  |      | 796   |      |   | 770   |  |      | 747 |      |   | 717 |  |   | 687
|Ashley Park                |  | 93                  | % |  | 91                                | % |  | 94   | % |  | 93   | % |  | 94   | % |  |      | 695   |      |   | 677   |  |      | 680 |      |   | 679 |  |   | 657



14



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##### Table of Contents

|                           |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |       |  |       |  |      |  |      |  |     
|-------------------------- |  | ------------------- | - |  | --------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ----- |  | ----- |  | ---- |  | ---- |  | ----
|                           |  | Occupancy Rates (2) |   |  | December Average Rental Rates (3)
|Property (1)               |  | 2004                |   |  | 2003                              |   |  | 2002 |   |  | 2001 |   |  | 2000 |   |  | 2004  |  | 2003  |  | 2002 |  | 2001 |  | 2000
|Hampton Glen               |  | 94                  | % |  | 91                                | % |  | 92   | % |  | 93   | % |  | 93   | % |  | 783   |  | 752   |  | 768  |  | 767  |  | 751 
|Trolley Square             |  | 90                  | % |  | 93                                | % |  | 94   | % |  | 96   | % |  | 97   | % |  | 711   |  | 695   |  | 663  |  | 678  |  | 650 
|The Gables                 |  | 95                  | % |  | 93                                | % |  | 91   | % |  | 88   | % |  | 92   | % |  | 743   |  | 723   |  | 719  |  | 716  |  | 702 
|Chase Gayton               |  | 92                  | % |  | 92                                | % |  | 91   | % |  | 93   | % |  |     |   |  | 786   |  | 766   |  | 769  |  | 759  |  |    
|Waterford                  |  | 91                  | % |  | 92                                | % |  | 89   | % |  | 96   | % |  |     |   |  | 806   |  | 786   |  | 768  |  | 603  |  |    
|Arbor Trace                |  | 98                  | % |  | 98                                | % |  | 95   | % |  | 90   | % |  | 90   | % |  | 850   |  | 773   |  | 729  |  | 679  |  | 686 
|Harbour Club               |  | 99                  | % |  | 98                                | % |  | 97   | % |  | 90   | % |  | 92   | % |  | 834   |  | 773   |  | 724  |  | 702  |  | 686 
|Mayflower Seaside          |  | 95                  | % |  | 94                                | % |  | 97   | % |  | 97   | % |  | 95   | % |  | 918   |  | 894   |  | 849  |  | 787  |  | 758 
|                           |  |                     |   |  |                                   |   |  |      |   | 
|Texas                      |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |       |  |       |  |      |  |      |  |     
|Brookfield                 |  | 81                  | % |  | 81                                | % |  | 92   | % |  | 96   | % |  | 94   | % |  | 522   |  | 567   |  | 607  |  | 609  |  | 581 
|Toscana                    |  | 80                  | % |  | 76                                | % |  | 88   | % |  | 91   | % |  | 94   | % |  | 488   |  | 523   |  | 560  |  | 578  |  | 571 
|Paces Cove                 |  | 86                  | % |  | 78                                | % |  | 84   | % |  | 88   | % |  | 91   | % |  | 526   |  | 543   |  | 600  |  | 625  |  | 595 
|Timberglen                 |  | 85                  | % |  | 82                                | % |  | 83   | % |  | 88   | % |  | 91   | % |  | 576   |  | 585   |  | 626  |  | 652  |  | 639 
|Summer Tree                |  | 91                  | % |  | 86                                | % |  | 90   | % |  | 92   | % |  | 96   | % |  | 482   |  | 506   |  | 529  |  | 564  |  | 552 
|Devonshire                 |  | 87                  | % |  | 85                                | % |  | 85   | % |  | 90   | % |  | 90   | % |  | 689   |  | 700   |  | 744  |  | 746  |  | 727 
|The Courts on Pear Ridge   |  | 90                  | % |  | 91                                | % |  | 90   | % |  | 95   | % |  | 95   | % |  | 634   |  | 664   |  | 710  |  | 727  |  | 710 
|Eagle Crest                |  | 85                  | % |  | 82                                | % |  | 89   | % |  | 92   | % |  | 91   | % |  | 601   |  | 646   |  | 665  |  | 694  |  | 682 
|Remington Hills            |  | 86                  | % |  | 85                                | % |  | 86   | % |  | 88   | % |  | 91   | % |  | 764   |  | 776   |  | 838  |  | 852  |  | 843 
|Estrada Oaks               |  | 85                  | % |  | 83                                | % |  | 89   | % |  | 93   | % |  | 90   | % |  | 584   |  | 640   |  | 666  |  | 662  |  | 643 
|Aspen Hills                |  | 83                  | % |  | 85                                | % |  | 90   | % |  | 92   | % |  | 90   | % |  | 527   |  | 526   |  | 576  |  | 569  |  | 550 
|Mill Crossing              |  | 83                  | % |  | 85                                | % |  | 90   | % |  | 90   | % |  | 91   | % |  | 518   |  | 539   |  | 575  |  | 565  |  | 548 
|Cottonwood                 |  | 82                  | % |  | 75                                | % |  | 87   | % |  | 93   | % |  | 94   | % |  | 547   |  | 578   |  | 639  |  | 596  |  | 578 
|Burney Oaks                |  | 87                  | % |  | 85                                | % |  | 91   | % |  | 90   | % |  | 93   | % |  | 625   |  | 657   |  | 685  |  | 691  |  | 678 
|Copper Crossing            |  | 79                  | % |  | 79                                | % |  | 89   | % |  | 92   | % |  | 87   | % |  | 518   |  | 535   |  | 544  |  | 537  |  | 520 
|The Arbors on Forest Ridge |  | 90                  | % |  | 84                                | % |  | 89   | % |  | 89   | % |  | 91   | % |  | 577   |  | 631   |  | 660  |  | 684  |  | 664 
|Park Village               |  | 92                  | % |  | 91                                | % |  | 92   | % |  | 96   | % |  | 95   | % |  | 542   |  | 560   |  | 574  |  | 599  |  | 569 
|Wildwood                   |  | 93                  | % |  | 90                                | % |  | 91   | % |  | 93   | % |  | 88   | % |  | 617   |  | 632   |  | 670  |  | 685  |  | 662 
|Main Park                  |  | 90                  | % |  | 89                                | % |  | 95   | % |  | 95   | % |  | 98   | % |  | 749   |  | 786   |  | 788  |  | 815  |  | 779 
|Paces Point                |  | 85                  | % |  | 77                                | % |  | 87   | % |  | 94   | % |  | 93   | % |  | 584   |  | 600   |  | 668  |  | 699  |  | 669 
|Silverbrook I              |  | 83                  | % |  | 87                                | % |  | 87   | % |  | 91   | % |  | 94   | % |  | 578   |  | 581   |  | 620  |  | 626  |  | 598 
|Silverbrook II             |  | 80                  | % |  | 80                                | % |  | 89   | % |  | 90   | % |  | 92   | % |  | 536   |  | 553   |  | 579  |  | 578  |  | 557 
|Grayson I and II           |  | 90                  | % |  | 89                                | % |  | 92   | % |  | 93   | % |  | 94   | % |  | 682   |  | 705   |  | 735  |  | 754  |  | 735 
|Canyon Hills               |  | 94                  | % |  | 90                                | % |  | 88   | % |  | 93   | % |  | 97   | % |  | 660   |  | 658   |  | 740  |  | 809  |  | 784 
|Windsor Heights            |  | 92                  | % |  | 89                                | % |  | (4   | ) |  |     |   |  |     |   |  | 1,018 |  | 1,045 |  | 917  |  |     |  |    
|The Meridian               |  | 88                  | % |  | 88                                | % |  | 92   | % |  | 95   | % |  | 97   | % |  | 548   |  | 595   |  | 644  |  | 691  |  | 664 
|Cutters Point             |  | 87                  | % |  | 81                                | % |  | 85   | % |  | 91   | % |  | 95   | % |  | 751   |  | 740   |  | 806  |  | 832  |  | 785 
|Sierra Ridge               |  | 92                  | % |  | 90                                | % |  | 90   | % |  | 88   | % |  | 90   | % |  | 579   |  | 564   |  | 555  |  | 536  |  | 524 
|                           |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |       |  |       |  |      |  |      |  |     
|                           |  | 89                  | % |  | 87                                | % |  | 89   | % |  | 91   | % |  | 92   | % |  | 674   |  | 678   |  | 686  |  | 799  |  | 674 
|                           |  |                     |   |  |                                   |   |  |      |   |  |      |   |  |      |   |  |       |  |       |  |      |  |      |  |     



Notes to table of
occupancy rates and average rental rates:



|(1) |  | An open item denotes that the company did not own the property during the period indicated.
|--- |  | -------------------------------------------------------------------------------------------

|(2) |  | Economic occupancy percentage reflects scheduled rent divided by gross potential rent.
|--- |  | --------------------------------------------------------------------------------------

|(3) |  | Average rent per month reflects Decembers monthly gross potential rent divided by the propertys number of apartment homes.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

|(4) |  | This property was acquired in late December 2002, and therefore economic occupancy percentage was not available.
|--- |  | ----------------------------------------------------------------------------------------------------------------



15



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##### Table of Contents

Item 3.Legal Proceedings



None of the company, its subsidiaries or apartment communities are presently subject to any material litigation nor, to the companys knowledge, is
any material litigation threatened against the company or any of its subsidiaries or apartment communities, other than ordinary routine actions incidental to the companys business, some of which are expected to be covered by insurance and all
of which collectively are not expected to have a material adverse effect on the business or financial condition or results of operations of the company.



Item 4.Submission of Matters to a Vote of Security Holders



No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2004.



PART II



Item 5.Market for Registrants Common Equity and Related Stockholder Matters



Common Shares



The companys common shares are traded on the New York Stock Exchange (NYSE) under the symbol TCR. The following table sets
forth the quarterly high and low sale prices per common share on the NYSE for each quarter of the last two years and the cash distributions declared and paid for each quarterly period indicated.



|               |  |      |       |     |   |                                    |  |   |     
|-------------- |  | ---- | ----- | --- | - | ---------------------------------- |  | - | ----
|               |  | High |       | Low |   | Cash Distribution per Common Share
|2003           |  |      |       |     |   |                                    |  |   |     
|First Quarter  |  | $    | 8.25  |     | $ | 6.85                               |  | $ | 0.28
|Second Quarter |  |      | 8.12  |     |   | 6.90                               |  |   | 0.20
|Third Quarter  |  |      | 8.50  |     |   | 7.11                               |  |   | 0.20
|Fourth Quarter |  |      | 9.39  |     |   | 8.00                               |  |   | 0.20
|               |  |      |      
|2004           |  |      |       |     |   |                                    |  |   |     
|First Quarter  |  | $    | 9.64  |     | $ | 8.76                               |  | $ | 0.20
|Second Quarter |  |      | 9.35  |     |   | 7.43                               |  |   | 0.20
|Third Quarter  |  |      | 9.87  |     |   | 8.39                               |  |   | 0.20
|Fourth Quarter |  |      | 10.40 |     |   | 9.50                               |  |   | 0.20



On March 1, 2005, the
closing sale price of our common stock was $9.50 per share on the NYSE, and there were 1,818 shareholders of record holding a total of 56,394,008 outstanding shares of common stock.



Pursuant to the Merger Agreement with Colonial described in Part I, Item 1 above, the company agreed to defer future
dividends on its common shares until it resolved certain tax matters with the Internal Revenue Service. The company also agreed that the record date for each future company dividend would be the same as the corresponding dividend paid by Colonial.
On January 28, 2005, the company signed a closing agreement with the IRS resolving the tax matters. On February 11, 2005, the company paid a regular quarterly cash dividend in the amount of $0.20 per common share to common shareholders of record on
February 4, 2005.



Distributions of $44.7 million and $45.3
million were made to the common shareholders during 2004 and 2003, respectively.



The timing and amounts of distributions to shareholders are within the discretion of the companys board of directors. Future distributions will depend on the companys results of operations, cash flow from
operations,



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economic conditions and other factors, such as working capital, cash requirements to fund investing and financing activities, capital expenditure
requirements, including improvements to and expansions of properties and the acquisition of additional properties, as well as the distribution requirements under federal income tax provisions for qualification as a REIT. The companys
distributions to its shareholders also may be limited by the agreements pertaining to the companys secured lines of credit.



For federal income tax purposes, distributions paid to common shareholders may consist of ordinary income, capital gains distributions, non-taxable return
of capital, or a combination thereof. Distributions constitute ordinary income to the extent of the companys current and accumulated earnings and profits. Distributions which exceed the companys current and accumulated earnings and
profits constitute a return of capital rather than a dividend to the extent of a shareholders basis in his common shares and reduce the shareholders basis in the common shares. To the extent that a distribution exceeds both the
companys current and accumulated earnings and profits and the shareholders basis in his common shares, it is generally treated as gain from the sale or exchange of that shareholders common shares. The company notifies shareholders
annually as to the taxability of distributions paid during the preceding year. In 2004, approximately 76.4% of distributions on common shares represented a return of capital, 13.5% represented ordinary income, .5% represented qualified dividend
income, 7.9% represented unrecaptured Section 1250 gain and 1.7% represented long-term capital gain.



The company has a Dividend Reinvestment and Share Purchase Plan (as amended, the Plan) which allows any record holder to reinvest
distributions without payment of any brokerage commissions or other fees. Of the total proceeds raised from common shares during the years ended December 31, 2004, 2003, and 2002, $4.9 million, $5.4 million, and $6.8 million, respectively, were
provided through the reinvestment of distributions.



In
addition, the Plan had a direct purchase feature in which investors could acquire common shares by making cash payments without payment of any brokerage commissions or other fees. During 2004 and 2003, direct purchases accounted for $0.8 million and
$0.7 million, respectively, of the proceeds raised under the Plan. The direct purchase feature was stopped on November 20, 2004, pursuant to the merger agreement with Colonial Properties Trust.



In September 2000, the Board of Directors authorized the repurchase of up to
an additional $50 million of the companys common shares. Under this authorization, the company has, as of December 31, 2004, repurchased 2.0 million common shares at an average price of $10.80 per share for a total cost of $21.3 million;
however, the company did not repurchase any common shares in 2004.



Preferred Shares



On December 21, 2004, the
company redeemed all 127,380 outstanding Series A Convertible Preferred Shares. The company paid a redemption price of $25 per share and dividends for a total of $3.3 million in cash. The difference between the total consideration given and the
carrying value of the preferred shares totaled approximately $0.5 million and is included in the statements of operations as a reduction to arrive at net loss available to common shareholders.Pursuant to the Merger Agreement with Colonial,
the company was required to redeem the Series A Convertible Preferred Shares.The company declared and paid total distributions of $2.3042 and $2.3752 per share on the preferred shares during 2004 and 2003, respectively.



Item 6.Selected Financial Data



The following table sets forth selected consolidated financial and other information as of and for each of the years in the five-year period ended
December 31, 2004. The table should be read in conjunction with our consolidated financial statements and the notes thereto, and Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere
in this report.



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|                                                                                                                                                |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | -------- | -
|                                                                                                                                                |  | As of December 31,                                                    |          
|                                                                                                                                                |  | 2004                                                                  |           |   | 2003 |   |           | 2002 |  |   | 2001      |   |  | 2000 |          
|                                                                                                                                                |  | (in thousands, except per share data and apartment communities owned) |          
|Operating Results                                                                                                                               |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|Rental and property income                                                                                                                      |  | $                                                                     | 182,492   |   |      | $ | 171,652   |      |  | $ | 159,866   |   |  | $    | 149,713   |   |  | $ | 143,574  |  
|Net (loss) income from continuing operations before gain on sales of investments and minority interest of unit holders in operating
partnership |  |                                                                       | (15,494   | ) |      |   | (9,432    | )    |  |   | (555      | ) |  |      | 17,117    |   |  |   | 34,202   |  
|Discontinued operations                                                                                                                         |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|(Loss) income from discontinued operations                                                                                                      |  |                                                                       |          |   |      |   | (15       | )    |  |   | 739       |   |  |      | 880       |   |  |   | 1,012    |  
|Gain on sales of investments                                                                                                                    |  |                                                                       |          |   |      |   | 1,887     |      |  |   |          |   |  |      |          |   |  |   |         |  
|Gain on sales of investments                                                                                                                    |  |                                                                       | 3,428     |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   | 22,930   |  
|Net (loss) income                                                                                                                               |  |                                                                       | (11,706   | ) |      |   | (7,298    | )    |  |   | 220       |   |  |      | 17,990    |   |  |   | 58,144   |  
|Distributions to preferred shareholders                                                                                                         |  |                                                                       | 294       |   |      |   | 303       |      |  |   | 303       |   |  |      | 7,698     |   |  |   | 30,305   |  
|Excess consideration paid over book value to preferred shareholders                                                                             |  |                                                                       | 505       |   |      |   |          |      |  |   |          |   |  |      | 27,492    |   |  |   |         |  
|Net (loss) income available to common shareholders                                                                                              |  |                                                                       | (12,505   | ) |      |   | (7,601    | )    |  |   | (83       | ) |  |      | (17,200   | ) |  |   | 27,839   |  
|Distributions to common shareholders                                                                                                            |  |                                                                       | 44,694    |   |      |   | 45,316    |      |  |   | 53,482    |   |  |      | 45,905    |   |  |   | 40,251   |  
|Per Share                                                                                                                                       |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|Net (loss) income per common share-basic and diluted from continued operations                                                                  |  | $                                                                     | (0.22     | ) |      | $ | (0.18     | )    |  | $ | (0.02     | ) |  | $    | (0.42     | ) |  | $ | 0.74     |  
|Net income per common share-basic and diluted from discontinued operations                                                                      |  | $                                                                     |          |   |      | $ | 0.04      |      |  | $ | 0.02      |   |  | $    | 0.02      |   |  | $ | 0.03     |  
|Net (loss) income per common share                                                                                                              |  | $                                                                     | (0.22     | ) |      | $ | (0.14     | )    |  | $ | 0.00      |   |  | $    | (0.40     | ) |  | $ | 0.77     |  
|Distributions per preferred share                                                                                                               |  | $                                                                     | 2.30      |   |      | $ | 2.38      |      |  | $ | 2.38      |   |  | $    | 2.31      |   |  | $ | 2.19     |  
|Distributions per common share                                                                                                                  |  | $                                                                     | 0.80      |   |      | $ | 0.88      |      |  | $ | 1.12      |   |  | $    | 1.12      |   |  | $ | 1.10     |  
|Distributions representing return of capital-tax basis                                                                                          |  |                                                                       | 76        | % |      |   | 93        | %    |  |   | 70        | % |  |      | 32        | % |  |   | 41       | %
|Weighted average shares outstanding-basic                                                                                                       |  |                                                                       | 56,025    |   |      |   | 52,643    |      |  |   | 48,068    |   |  |      | 43,450    |   |  |   | 36,081   |  
|Balance Sheet Data                                                                                                                              |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|Investment in rental property-gross                                                                                                             |  | $                                                                     | 1,323,334 |   |      | $ | 1,307,420 |      |  | $ | 1,158,827 |   |  | $    | 1,070,867 |   |  | $ | 866,841  |  
|Total assets                                                                                                                                    |  | $                                                                     | 1,091,348 |   |      | $ | 1,124,442 |      |  | $ | 1,014,847 |   |  | $    | 980,691   |   |  | $ | 799,781  |  
|Notes payable-unsecured                                                                                                                         |  | $                                                                     |          |   |      | $ |          |      |  | $ | 77,913    |   |  | $    | 55,000    |   |  | $ | 13,210   |  
|Notes payable-secured                                                                                                                           |  | $                                                                     | 822,081   |   |      | $ | 801,754   |      |  | $ | 604,446   |   |  | $    | 554,600   |   |  | $ | 245,423  |  
|Shareholders equity                                                                                                                            |  | $                                                                     | 232,856   |   |      | $ | 286,005   |      |  | $ | 287,074   |   |  | $    | 333,834   |   |  | $ | 522,002  |  
|Common shares outstanding                                                                                                                       |  |                                                                       | 56,328    |   |      |   | 55,534    |      |  |   | 48,361    |   |  |      | 47,665    |   |  |   | 34,926   |  
|Other Data                                                                                                                                      |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|Cash flow from:                                                                                                                                 |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|Operating activities                                                                                                                            |  | $                                                                     | 40,026    |   |      | $ | 41,678    |      |  | $ | 46,815    |   |  | $    | 51,836    |   |  | $ | 53,913   |  
|Investing activities                                                                                                                            |  | $                                                                     | (3,531    | ) |      | $ | (7,884    | )    |  | $ | (36,471   | ) |  | $    | (79,796   | ) |  | $ | 50,254   |  
|Financing activities                                                                                                                            |  | $                                                                     | (36,122   | ) |      | $ | (33,781   | )    |  | $ | (17,620   | ) |  | $    | 32,475    |   |  | $ | (116,294 | )
|Number of apartment communities owned at year-end                                                                                               |  |                                                                       | 87        |   |      |   | 89        |      |  |   | 82        |   |  |      | 80        |   |  |   | 72       |  
|Funds from operations calculation                                                                                                               |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|Net (loss) income                                                                                                                               |  | $                                                                     | (11,706   | ) |      | $ | (7,298    | )    |  | $ | 220       |   |  | $    | 17,990    |   |  | $ | 58,144   |  
|Adjustments:                                                                                                                                    |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|Gain on sales of investments                                                                                                                    |  |                                                                       | (3,428    | ) |      |   | (1,887    | )    |  |   |          |   |  |      |          |   |  |   | (22,930  | )
|Depreciation on investment in real estate joint ventures                                                                                        |  |                                                                       | 118       |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |         |  
|Depreciation and amortization of real estate assets                                                                                             |  |                                                                       | 54,783    |   |      |   | 52,956    |      |  |   | 46,021    |   |  |      | 39,999    |   |  |   | 36,295   |  
|Expenses associated with the proposed Colonial Properties Trust transaction                                                                     |  |                                                                       | 4,161     |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |         |  
|Minority interest of unit holders in operating partnership                                                                                      |  |                                                                       | (360      | ) |      |   | (262      | )    |  |   | (36       | ) |  |      |          |   |  |   |         |  
|                                                                                                                                                |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  
|Funds from operations (a)                                                                                                                       |  | $                                                                     | 43,568    |   |      | $ | 43,509    |      |  | $ | 46,205    |   |  | $    | 57,989    |   |  | $ | 71,509   |  
|                                                                                                                                                |  |                                                                       |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |          |  



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---

|(a) |  | Funds from Operations (FFO) is defined as net income (computed in accordance with generally accepted accounting principles) excluding gains and (losses) from sales of depreciable
property, minority interest of unit holders in operating partnerships, plus depreciation. This definition conforms with the National Association of Real Estate Investment Trusts (NAREIT) definition issued in October 1999 which was effective
beginning January 1, 2000. The companys management believes that FFO provides investors with an understanding of the companys ability to incur and service debt and make capital expenditures. The company considers FFO in evaluating
property acquisitions and its operating performance and believes that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of the companys activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to fund cash needs. In addition, there can be no assurance that the companys basis for computing FFO is comparable with that of other real estate investment trusts.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



Overview



Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, the company) is a self-administered and
self-managed REIT headquartered in Richmond, Virginia. The business of the company is to acquire, develop and manage existing residential apartment communities located in the southern United States. As of December 31, 2004, the company owned 87
apartment communities with 22,981 apartment homes, a third party property management business, apartment land under development and ownership in four real estate joint ventures. The companys apartment communities are located in Georgia, North
Carolina, South Carolina, Texas and Virginia.



The company owns
and operates multifamily apartment communities that generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The company separately evaluates the performance of each of its apartment
communities. However, because each of the apartment communities has similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single apartment communities segment. All segment
disclosure is included in or can be derived from the companys consolidated financial statements.



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The company uses property operating income (rental income less property operating expenses as defined
below) as a measure to evaluate performance of the apartment communities. Property operating income is not deemed to be an alternative to net income, as determined in accordance with generally accepted accounting principles. In addition, this
measure, as calculated by the company, may not be comparable to similarly entitled measures reported by other companies. Property operating expenses include the following expense categories: property and maintenance, taxes and insurance and property
management. The following is a summary of the companys financial highlights:



|                                                                            |  |              |         |   |      |   |         |              |  |        |      |  |   |         |   |  |          |         |   |  |          |  
|--------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ------------ |  | ------ | ---- |  | - | ------- | - |  | -------- | ------- | - |  | -------- | -
|                                                                            |  | December 31, |         |   |      |   |         | December 31, |  |        |      | 
|(In thousands)                                                              |  | 2004         |         |   | 2003 |   |         | % Change     |  |        | 2003 |  |   | 2002    |   |  | % Change |        
|Total revenues                                                              |  | $            | 182,492 |   |      | $ | 171,652 |              |  | 6.32   | %    |  | $ | 171,652 |   |  | $        | 159,866 |   |  | 7.37     | %
|Property operating expenses                                                 |  |              | 85,331  |   |      |   | 78,582  |              |  | 8.59   | %    |  |   | 78,582  |   |  |          | 69,432  |   |  | 13.18    | %
|Depreciation and amortization of real estate assets                         |  |              | 54,783  |   |      |   | 52,794  |              |  | 3.77   | %    |  |   | 52,794  |   |  |          | 45,157  |   |  | 16.91    | %
|General and administrative                                                  |  |              | 4,630   |   |      |   | 3,824   |              |  | 21.08  | %    |  |   | 3,824   |   |  |          | 3,904   |   |  | -2.05    | %
|Severance costs and organizational charges                                  |  |              | 760     |   |      |   |        |              |  | 100.00 | %    |  |   |        |   |  |          |        |   |  |         |  
|Interest expense                                                            |  |              | 46,090  |   |      |   | 45,896  |              |  | 0.42   | %    |  |   | 45,896  |   |  |          | 41,684  |   |  | 10.10    | %
|Expenses associated with the proposed Colonial Properties Trust transaction |  |              | 4,161   |   |      |   |        |              |  | 100.00 | %    |  |   |        |   |  |          |        |   |  |         |  
|Gain on sales of investments                                                |  |              | 3,428   |   |      |   | 1,887   |              |  | 81.66  | %    |  |   | 1,887   |   |  |          |        |   |  | 100.00   | %
|Excess consideration paid over book value to preferred shareholders         |  |              | 505     |   |      |   |        |              |  | 100.00 | %    |  |   |        |   |  |          |        |   |  |         |  
|Net (loss) income from discontinued operations                              |  |              |        |   |      |   | (15     | )            |  | 100.00 | %    |  |   | (15     | ) |  |          | 739     |   |  | -102.03  | %
|Net loss available to common shareholders                                   |  |              | (12,505 | ) |      |   | (7,601  | )            |  | -64.52 | %    |  |   | (7,601  | ) |  |          | (83     | ) |  | -9057.83 | %



Each of these items
will be described in further detail later in our discussion.



The companys operations are affected by the following factors: demand for apartment communities in the companys markets and the effect on occupancy levels and rental rates, job growth, overbuilding of apartment communities in
certain markets, low home mortgage interest rates and the availability of refinancing.



On May 28, 2003, the company completed the acquisition of Merry Land Properties, Inc. (Merry Land), which owned nine apartment communities containing 1,966 apartment homes located in South Carolina and
Georgia, interests in two joint ventures, two parcels of undeveloped land that the company plans to develop into additional apartment homes and a third party property management business. The purchase price was $159.4 million, which includes the
issuance of equity, assumption of debt and the fair value adjustment to debt, and direct costs of the acquisition.



As of December 31, 2004, the company managed ten apartment communities with 2,242 apartment homes owned by third parties.



The company, as the general partner, also has approximately an 85% interest
in the Cornerstone NC Operating Limited Partnership. This partnership holds certain apartment communities in North Carolina and was formed by the company and the prior owner, which is a minority limited partner and is not otherwise related to the
company.



As of December 31, 2004, the company had interests in
four real estate joint ventures. Two of the joint ventures own apartment communities under development and the other two joint ventures own three apartment communities. The company manages three of these apartment communities. One of the apartment
communities



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under development is almost complete as of December 31, 2004 and the company manages the apartment units as they become ready for occupancy. The company does
not control these assets and has accounted for its investments under the equity method of accounting. The investments in the joint ventures are recorded at cost and subsequently adjusted for equity in net income (loss) and cash contributions and
distributions.



The company operated in 17 markets overall. At
December 31, 2004, the companys three largest markets comprised 52% of its real estate owned, at cost. The following table summarizes the companys apartment market information (dollars in thousands):



|                              |  |                               |  |            |           |                             |     |      |                         |        |                                  |    |   |  |    |  
|----------------------------- |  | ----------------------------- |  | ---------- | --------- | --------------------------- | --- | ---- | ----------------------- | ------ | -------------------------------- | -- | - |  | -- | -
|Market                        |  | Number ofApartmentCommunities |  | Total Cost |           | % ofTotal Cost ofApartments |     |      | Number ofApartmentHomes |        | Annual AverageEconomic Occupancy |   
|                              |  |                               |  |            | 2004      |                             |     | 2003 |                        
|Dallas/Fort Worth, TX         |  | 26                            |  | $          | 321,585   |                             | 25  | %    |                         | 6,776  |                                  | 87 | % |  | 84 | %
|Charlotte, NC                 |  | 12                            |  |            | 191,475   |                             | 15  | %    |                         | 3,127  |                                  | 89 | % |  | 83 | %
|Raleigh/Durham, NC            |  | 10                            |  |            | 151,717   |                             | 12  | %    |                         | 2,428  |                                  | 88 | % |  | 87 | %
|Atlanta, GA                   |  | 6                             |  |            | 120,963   |                             | 9   | %    |                         | 1,841  |                                  | 86 | % |  | 83 | %
|Richmond, VA                  |  | 6                             |  |            | 103,822   |                             | 8   | %    |                         | 1,696  |                                  | 93 | % |  | 92 | %
|Charleston, SC                |  | 6                             |  |            | 98,111    |                             | 7   | %    |                         | 1,544  |                                  | 92 | % |  | 94 | %
|Savannah, GA                  |  | 5                             |  |            | 81,593    |                             | 6   | %    |                         | 1,149  |                                  | 94 | % |  | 90 | %
|Virginia Beach, VA            |  | 4                             |  |            | 40,615    |                             | 3   | %    |                         | 910    |                                  | 97 | % |  | 95 | %
|Other (9 markets)             |  | 12                            |  |            | 199,999   |                             | 15  | %    |                         | 3,510  |                                  | 89 | % |  | 87 | %
|                              |  |                               |  |            |           |                             |     |      |                         |        |                                  |    |   |  |    |  
|                              |  | 87                            |  |            | 1,309,880 |                             | 100 | %    |                         | 22,981 |                                  | 89 | % |  | 87 | %
|Real estate under development |  |                              |  |            | 13,454    |                             |    |      |                         |       |                                  |   |   |  |   |  
|                              |  |                               |  |            |           |                             |     |      |                         |        |                                  |    |   |  |    |  
|                              |  | 87                            |  | $          | 1,323,334 |                             | 100 | %    |                         | 22,981 |                                  | 89 | % |  | 87 | %
|                              |  |                               |  |            |           |                             |     |      |                         |        |                                  |    |   |  |    |  



Recent Events



Acquisition by Colonial Properties Trust



On October 25, 2004, the company entered into an Agreement and Plan of
Merger (the Merger Agreement) with Colonial Properties Trust (Colonial) and CLNL Acquisition Sub LLC under which the company will merge with and into CLNL Acquisition Sub LLC. Pursuant to a registration statement filed with
the Securities and Exchange Commission that became effective on February 11, 2005, the company mailed a joint proxy statement/prospectus to its shareholders, seeking approval of the merger and of the related plan of merger. The company has called a
special meeting of its shareholders for April 1, 2005, at which the shareholder vote on the merger is scheduled to take place.



Under the terms of the Merger Agreement, company shareholders have the right to elect to receive Colonial common shares or preferred depositary shares,
subject to the restriction that the preferred depositary shares issued will not exceed approximately 25 percent of the total merger consideration. Company shareholders who receive common shares are expected to receive 0.2581 Colonial common shares
for each company share. The company shareholders who receive preferred depositary shares are expected to receive 0.4194 shares of $25 liquidation preference redeemable Series E Preferred Depositary Shares with a dividend rate of 7.62 percent
(subject to increase based on future increases in the level of Colonial common share dividends above $0.79 per share) for each company share. The conversion rates are subject to adjustments provided for in the Merger Agreement, although the company
does not expect any further material adjustments in the conversion rates.



There are a number of conditions that must occur for the merger to close. These conditions include the required approval by the shareholders of both the company and Colonial, and the receipt of necessary consents.



The company has the right to terminate the transactions under
the Merger Agreement if Colonials average closing common share price for the 20 trading days preceding 10 trading days prior to the close of the transaction is



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below $31.00, subject to Colonials right to pay additional consideration, in the form of Colonial common shares, cash or a combination, equal to $31.00
minus Colonials average closing common share price. Colonial has the right to terminate the transaction if Colonials average closing common share price for the same period is above $49.00. On March 14, 2005 Colonials closing common
share price was $36.60.



Tax Matters



A REIT generally is not taxed at the corporate level on income that it
currently distributes to its shareholders, provided that a number of technical REIT qualification requirements are satisfied on a continuing basis. In general, an entity that fails to qualify as a REIT is subject to federal and state income tax as a
regular corporation, and distributions it makes to its shareholders are not deductible in computing its income tax.



During the course of the due diligence investigation and negotiations leading to the merger agreement with Colonial, several technical REIT qualification
tax issues were identified. A closing agreement with the IRS or other mutually satisfactory resolution of these issues was one of the conditions to closing the proposed merger with Colonial. On January 25, 2005, the company signed a closing
agreement with the IRS resolving specified tax matters in connection with the companys investment in Cornerstone Acquisition Company, one of its subsidiaries, and resolving other tax matters. Under the closing agreement, the company paid
$100,000 to the IRS. The closing agreement also provides that the company will not be assessed any additional tax, interest or penalties, and does not require the company to pay dividends to any of its shareholders or make any other adjustments, in
connection with the resolution of the tax matters addressed by the closing agreement.



Results of Operations



The following
discussion is based on the financial statements of the company as of December 31, 2004, 2003, and 2002. This information should be read in conjunction with the selected financial data and the companys consolidated financial statements included
elsewhere in this annual report.



Comparison of the year
ended December 31, 2004 to the year ended December 31, 2003



Income and Occupancy



The companys
property operations for the year ended December 31, 2004 include the results of operations of 87 apartment communities acquired to date for the entire year. The operations of the two apartment communities sold on July 22, 2004 are reflected through
the sale date.



The principle source of the
companys revenue is the rental operation of its apartment communities. In addition, the company includes the income earned on sub-metering of utilities as permitted by local and state regulations and a flat fee charged for trash services in
select markets. Rental income increased 5.1% in 2004 to $171.3 million, up $8.3 million over 2003. The increase in revenue is primarily due to the rental income generated from the additional apartment communities acquired through the Merry Land
merger since May 28, 2003, partially offset by the sale of the apartment communities discussed above.The increase in economic occupancy levels also contributed to the increase in revenues, however, the increase was offset by a decrease in
the average rental rate.



Overall economic occupancy (scheduled
rent divided by gross potential rent) for the companys apartment communities averaged 89% and 87% for the year ended December 31, 2004 and 2003, respectively. Average rental rate per apartment home in 2004 was $674 and $681 in 2003.



Fee management and other property income increased $2.6
million in 2004 over 2003. Fee management and other property income includes ancillary income, various fees charged to tenants and third party management income and third party reimbursement for employee related costs. Since the company is the
primary obligor, has supplier discretion and bears credit risk for third party expenses, the company in 2004 recorded reimbursement revenue for out-of-pocket expenses. Reimbursement revenue was recorded when the underlying reimbursable costs were
incurred. For the year ended December 31, 2003, other property income also included approximately



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$0.6 million in excess recoveries from casualty insurance over the cost of the damage.The majority of the increase in fee management and other
property income is due to the additional apartment communities and the third party property management business acquired through the Merry Land merger.



The company will continue to add revenue-enhancing improvements in an effort to improve the apartment communities marketability, economic
occupancies, and rental rates.



Expenses



Property operating expenses include the following expense categories:
property and maintenance, taxes and insurance and property management. These categories primarily consist of property taxes and insurance, repairs and maintenance, utilities, payroll costs and advertising and marketing. Property operating expenses
in 2004 were $85.3 million and $78.6 million in 2003.The increase is primarily due to a full year of property operating expenses of the apartment communities acquired in the Merry Land merger. The increases in real estate assessments and tax
rates, utilities costs, and property insurance costs also contributed to the increase in property operating expenses. The property operating expense ratio (the ratio of property operating expenses to rental income) was 49.8% and 48.2% for 2004 and
2003, respectively due to the increases mentioned above.



Depreciation and amortization of real estate assets increased to $54.8 million in 2004 from $52.8 million in 2003. The increase in depreciation expense is due to a full year of depreciation of the apartment communities acquired in the Merry
Land merger and the depreciation associated with capital improvements made during 2004 and 2003. In addition, in conjunction with the Merry Land merger, the company allocated a portion of the Merry Land purchase price to an intangible asset based on
a valuation of in-place leases at the time of the merger in the amount of $1.1 million. None of the intangible asset value was attributable to above or below market rates, but rather attributable to foregone costs associated with having in-place
leases. The company recorded $0.2 million and $0.9 million of amortization of the net intangibles in 2004 and 2003, respectively. This intangible was fully amortized during the first half of 2004.



General and administrative expenses totaled $4.6 million, or 2.7% of rental
income in 2004 and totaled $3.8 million, or 2.3% of rental income in 2003. These expenses represent the administrative expenses of the company as distinguished from the property operating expenses of the companys apartment communities. In
2004, the company incurred $0.5 million in costs associated with Sarbanes-Oxley Act of 2002.



Severance Costs and Other Organizational Charges



On March 31, 2004, the companys Co-Chief Operating Officer ceased to serve as an officer and employee of the company and her employment agreement with the company was terminated. In addition, the company
terminated the lease for its Fort Worth, Texas office. These charges are included in the Consolidated Statements of Operations under the category Severance costs and other organizational charges. The majority of the $0.8 million charge
will be paid out over a period of 30 months. As of December 31, 2004, the remaining severance costs and other organizational charges liability was $0.4 million.



Fee Management and Other Expenses



The companys third party management contracts provide for reimbursement of employee related costs, discussed above. The reimbursable costs are
expensed as incurred. For 2004, these reimbursable costs totaled $1.9 million.



Interest Income



The
companys interest income decreased $0.2 million for the year ended December 31, 2004 over 2003. The majority of the decrease is due to the repayment of the notes receivables assumed in connection with the Merry Land merger during the first
half of 2004.



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Interest Expense



The company incurred $46.1 million and $45.9 million of interest expense in 2004 and 2003, respectively, associated with
borrowings under its secured and unsecured lines of credit, existing and assumed mortgage notes, amortization of deferred financing costs and interest associated with the companys capital leases. Interest expense increased in 2004 due to the
interest expense associated with the secured debt assumed in the Merry Land merger, 2003 borrowings and the incremental effect of the 2004 borrowings. The increase in interest expense in 2004 was offset by the reduction of the weighted average
interest rate for all borrowings and the increase in capitalized interest on development and renovation projects. The average outstanding debt increased in 2004 compared to 2003. The overall weighted average interest rate for all borrowings was 5.5%
and 5.9% for 2004 and 2003, respectively. Interest capitalized on development and renovation projects increased from $0.1 million in 2003 to $0.5 million in 2004. The company amortized as interest expense deferred financing costs of $1.4 million and
$1.3 million for 2004 and 2003, respectively.



Interest expense
is reduced by the amortization of the fair value premium adjustment recorded in connection with the assumption of above market rate debt in connection with the Merry Land acquisition and other acquisition of apartment communities. The premiums are
amortized over the remaining term of the related indebtedness on the effective interest method. Premium amortization for 2004 and 2003 was $3.3 million and $2.2 million, respectively.



Average debt, secured and unsecured, increased from $753 million in 2003 to $818 million in 2004. The increase is due to the
full effect of the fixed and variable rate borrowings obtained or assumed in 2003 and the incremental effect of the 2004 fixed and variable rate borrowing obtained or assumed in 2004.



Colonial Properties Trust Merger Expense



On October 25, 2004, the company entered into a merger agreement with Colonial under which the company will merge
into a subsidiary of Colonial. The costs the company had incurred in conjunction with the merger as of December 31, 2004 totaled $4.2 million. These costs are included in the statements of operations under the category Expenses associated with
the proposed Colonial Property Trust transaction. The majority of the costs are for investment banking, legal, tax and accounting services related to the merger.



Gain on Sales of Investments



On July 22, 2004, the company sold two of its apartment communities in Columbia, SC to Sterling American Property LP for
$16.4 million and retained a 10% limited partnership interest in the entity. The company will continue to manage these apartment communities under a standard fee management contract. In accordance with generally accepted accounting principles, since
the sale was to an unrelated buyer, collection of the sales price has occurred and the company will not be required to support the operations of the property or its related obligations to an extent greater than its proportionate interest, the
company has recognized the part of the profit (90%) proportionate to the outside interests in the buyer at the date of sale. The resulting gain for financial reporting purposes was approximately $3.4 million. The company has not classified this sale
as discontinued operations in the statement of operations since the company continues to hold a 10% interest in the entity that owns the underlying apartment communities.



Discontinued Operations



During the first quarter of 2003, the company sold two apartment communities containing a total of 395 apartment homes for a total sales price of $15.9
million and recognized a gain of $1.9 million. As a result of the sales, the companys financial statements presented have been prepared with these two apartment communities results of operations and the gain from sale isolated and shown
as discontinued operations. All historical statements have been restated to conform to this presentation in accordance with SFAS No. 144.



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Excess Consideration Paid Over Book Value to Preferred Shareholders



On December 21, 2004, the company redeemed all 127,380 outstanding Series A
Convertible Preferred Shares. The company paid a redemption price of $25 per share and dividends for a total of $3.3 million in cash. The difference between the total consideration given and the carrying value of the preferred shares (including
issuance costs) totaled approximately $0.5 million and is included in the statements of operations as a reduction to arrive at net loss available to common shareholders.



Comparable Property Operations



Property operating income is a measure the company uses to evaluate performance and is not deemed to be an alternative to
net income, as determined in accordance with generally accepted accounting principles. In addition, this measure, as calculated by the company, may not be comparable to similarly entitled measures reported by other companies. The companys
same-community portfolio consists of 77 stabilized apartment communities, containing 20,542 apartment homes, that the company has owned since January 1, 2003, representing approximately 89% of the companys 22,981 apartment homes.
The two apartment communities sold in the third quarter of 2004 have been eliminated from the calculation. Property management expenses are excluded from this evaluation. For 2004, same-community property operating income (rental income
less property operating expenses) remained the same, rental income increased 1% and property operating expenses increased 3% over 2003. The companys property operating expenses increased primarily due to higher utility costs, real estate
assessments and property insurance costs. Average monthly rental rates for the same-community portfolio decreased 2% to $651 per apartment home in 2004 from $667 per apartment home in 2003.



Property operating expenses primarily consist of property taxes and
insurance, repairs and maintenance, utilities, payroll costs, and advertising and marketing. In addition, property operating expenses exclude depreciation, general and administrative, fee management and other expenses, interest income and expense
and minority interest, as these are not considered in the operating performance of the apartment communities.



The following is a reconciliation of the same community property operating income to net loss as determined in accordance with generally
accepted accounting principles (in thousands):



|                                                                            |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                            |  | 2004 |         |   | 2003 |  
|Comparable properties (same communities)                                    |  |      |         |   |      |   |         |  
|Rental and other property income                                            |  | $    | 156,235 |   |      | $ | 154,303 |  
|Property operating expenses                                                 |  |      | (70,528 | ) |      |   | (68,403 | )
|                                                                            |  |      |         |   |      |   |         |  
|Property operating income                                                   |  |      | 85,707  |   |      |   | 85,900  |  
|Non-comparable properties (remaining communities)                           |  |      |         |   |      |   |         |  
|Rental and other property income                                            |  |      | 24,027  |   |      |   | 17,072  |  
|Property operating expenses                                                 |  |      | (9,070  | ) |      |   | (6,077  | )
|                                                                            |  |      |         |   |      |   |         |  
|Property operating income                                                   |  |      | 14,957  |   |      |   | 10,995  |  
|Fee management income and other income/expenses                             |  |      | 1,923   |   |      |   | 277     |  
|Depreciation and amortization of real estate assets                         |  |      | (54,783 | ) |      |   | (52,794 | )
|Property management                                                         |  |      | (5,426  | ) |      |   | (4,102  | )
|General and administrative                                                  |  |      | (4,630  | ) |      |   | (3,824  | )
|Severance costs and other organizational charges                            |  |      | (760    | ) |      |   |        |  
|Other depreciation                                                          |  |      | (110    | ) |      |   | (23     | )
|Fee Management and other                                                    |  |      | (2,161  | ) |      |   | (239    | )
|Interest income                                                             |  |      | 40      |   |      |   | 274     |  
|Interest expense                                                            |  |      | (46,090 | ) |      |   | (45,896 | )
|Expenses associated with the proposed Colonial Properties Trust transaction |  |      | (4,161  | ) |      |   |        |  
|Gain on sales of investments                                                |  |      | 3,428   |   |      |   |        |  
|Minority interest of unit holders in operating partnership                  |  |      | 360     |   |      |   | 262     |  
|Net income from discontinued operations                                     |  |      |        |   |      |   | 1,872   |  
|                                                                            |  |      |         |   |      |   |         |  
|Net loss                                                                    |  | $    | (11,706 | ) |      | $ | (7,298  | )
|                                                                            |  |      |         |   |      |   |         |  



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Comparison of the year ended December 31, 2003 to the year ended December 31, 2002



Income and Occupancy



During 2003, the company was still experiencing weakness in occupancy rates
and decreases in rental rates as a result of the slow recovery from the recession, new apartment construction, and the strength of the single family housing industry.



The companys property operations for the year ended December 31, 2003 include the results of operations of 89
apartment communities acquired to date, including apartment communities acquired through the Merry Land merger on May 28, 2003. The operations of the two apartment communities sold during the first quarter of 2003 are reflected in
discontinued operations. The increases in revenue are primarily due to the effect of the rental income generated from the apartment communities acquired through the Merry Land merger and the full effect in 2003 of the two apartment
communities acquired and the two phases to existing apartment communities completed in 2002; however, the increase was offset by the increase in rental concessions and the decrease in economic occupancy levels, discussed below, which resulted from
the continuing soft market conditions in the major markets in which the company operates.



Rental income increased 6.4% in 2003 to $163.1 million, up $9.8 million over 2002. Rental income from the Merry Land merger and the 2002 acquisitions accounted for the majority of the increase. In addition, the
company recorded a charge in 2002 of approximately $1.1 million due to a change in the estimate of the collectibility of tenant receivables. The increase in rental income is offset in part by a reduction in average economic occupancy from 89% in
2002 to 87% in 2003, and an increase in rental concessions.



Other property income increased $2.0 million in 2003 over 2002. For the year ended December 31, 2003, other property income also included approximately $0.6 million in excess recoveries from casualty insurance over the cost of the damage
and third party management income in the amount of $0.3 million.



Expenses



Property operating expenses in 2003
were $78.6 million and $69.4 million in 2002. The increase is primarily due to the incremental effect of the Merry Land merger and the full effect in 2003 of the 2002 acquisitions. The increases in real estate assessments and tax rates, utilities
costs, property insurance costs, and turnover costs due to the increase in vacancy also contributed to the increase in property operating expenses. The property operating expense ratio was 48.2% and 45.3% for 2003 and 2002, respectively due to the
increases mentioned above.



Depreciation and amortization of
real estate assets increased to $52.8 million in 2003 from $45.2 million in 2002, and is directly attributable to a full year of depreciation of the 2002 acquisitions, depreciation on the 2003 acquisitions from their respective acquisition dates and
the depreciation associated with capital improvements made during 2003 and 2002. In addition, the company recorded $0.9 million of amortization of the net intangibles in 2003 in conjunction with the Merry Land merger, discussed above.



General and administrative expenses totaled 2.3% and 2.5% of rental income in
2003 and 2002, respectively. The decrease is due to increased capitalization of certain costs.



Interest Income



The
companys interest income increased $0.3 million for the year ended December 31, 2003 over 2002. The majority of the increase is due to the interest income earned on the notes receivables assumed in connection with the Merry Land merger.



Interest Expense



The company incurred $45.9 million and $41.7 million of interest expense in
2003 and 2002, respectively, associated with borrowings under its secured and unsecured lines of credit, existing and assumed mortgage notes,



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amortization of deferred financing costs and interest associated with the companys capital leases. The increase was principally a result of the
following:



| |  |  | $3.6 million of the increase related to the interest on the existing and assumed fixed and variable mortgage notes. The increase was due to the interest expense associated with the
mortgage notes assumed with the Merry Land merger, a full year of interest expense on the $53.6 million of secured debt placed or assumed in 2002, and the $101.8 million refinancing completed in 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.5 million of the increase related to the amortization of the deferred financing cost associated with the $151.8 million financings.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.2 million of the increase related to interest associated with the companys capital leases.
| | - |  | ----------------------------------------------------------------------------------------------



The increase was partially offset by $0.1 million decrease related to the interest on the secured and unsecured lines of
credit.



The overall weighted average interest rate for all
borrowings was 5.9% and 6.5% during 2003 and 2002, respectively. Interest expense is reduced by the amortization of the fair value premium adjustment recorded in connection with the assumption of above market rate debt in connection with the
acquisition of apartment communities. Average debt, secured and unsecured, increased from $630 million in 2002 to $753 million in 2003. The increase is due to the full effect of the fixed and variable rate borrowings obtained or assumed in 2002 and
the incremental effect of the 2003 fixed and variable rate borrowing obtained or assumed in 2003.



Income from Discontinued Operations



During the first quarter of 2003, the company sold two apartment communities containing a total of 395 apartment homes for a total sales price of $15.9
million and recognized a gain of $1.9 million. As a result of the sales, the companys financial statements presented have been prepared with these two apartment communities results of operations and the gain from sale isolated and shown
as discontinued operations. Income from discontinued operations decreased from 2003 to 2002 due to the timing of the sale. All historical statements have been restated to conform to this presentation in accordance with SFAS No. 144.



Comparable Property Operations



The companys same-community portfolio consists of 74
stabilized apartment communities, containing 20,127 apartment homes, that the company has owned since January 1, 2002, representing approximately 87% of the companys 23,189 apartment homes. The two apartment communities sold in the first
quarter of 2003 have been eliminated from the calculation. Property management expenses are excluded from this evaluation. For 2003, same-community property operating income decreased 7%, rental income decreased 3% and property operating
expenses increased 4% over 2002. The decrease in rental income is primarily due to the soft overall market conditions, which resulted in increased rental concessions and lower average occupancies. The companys property operating expenses
increased primarily due to higher utility costs, real estate assessments and property insurance costs. Average monthly rental rates for the same-community portfolio decreased 4% to $661 per apartment home in 2003 from $685 per apartment
home in 2002.



In order to make a meaningful comparison of
property operating income for these apartment communities, the write-offs of tenant receivables and a one-time reduction to expenses were excluded. If this adjustment had been considered for the years ended December 31, 2003 and 2002, property
operating income would have decreased 9%; total revenues would have decreased 3%; and property operating expenses would have increased 5%.



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The following is a reconciliation of the same community property operating income to net
(loss) income as determined in accordance with generally accepted accounting principles (in thousands):



|                                                           |  |      |         |   |      |   |         |  
|---------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                           |  | 2003 |         |   | 2002 |  
|Comparable properties (same communities)                   |  |      |         |   |      |   |         |  
|Rental and other property income                           |  | $    | 158,146 |   |      | $ | 162,652 |  
|Property operating expenses                                |  |      | (66,637 | ) |      |   | (64,138 | )
|                                                           |  |      |         |   |      |   |         |  
|Property operating income                                  |  |      | 91,509  |   |      |   | 98,514  |  
|Non-comparable properties (remaining communities)          |  |      |         |   |      |   |         |  
|Rental and other property income                           |  |      | 21,407  |   |      |   | 4,857   |  
|Property operating expenses                                |  |      | (7,843  | ) |      |   | (2,099  | )
|                                                           |  |      |         |   |      |   |         |  
|Property operating income                                  |  |      | 13,564  |   |      |   | 2,758   |  
|Unallocated expenses                                       |  |      | (7,901  | ) |      |   | (7,040  | )
|Depreciation and amortization of real estate assets        |  |      | (52,794 | ) |      |   | (45,157 | )
|Property management                                        |  |      | (4,102  | ) |      |   | (3,798  | )
|General and administrative                                 |  |      | (3,824  | ) |      |   | (3,904  | )
|Other depreciation                                         |  |      | (23     | ) |      |   | (24     | )
|Other                                                      |  |      | (239    | ) |      |   | (251    | )
|Interest income                                            |  |      | 274     |   |      |   | 31      |  
|Interest expense                                           |  |      | (45,896 | ) |      |   | (41,684 | )
|Minority interest of unit holders in operating partnership |  |      | 262     |   |      |   | 36      |  
|Net income from discontinued operations                    |  |      | 1,872   |   |      |   | 739     |  
|                                                           |  |      |         |   |      |   |         |  
|Net (loss) income                                          |  | $    | (7,298  | ) |      | $ | 220     |  
|                                                           |  |      |         |   |      |   |         |  



Related-Party Transactions



During 2004, Mr. Glade M. Knight, the companys
Chairman and Chief Executive Officer, served as Chairman and Chief Executive Officer of three hospitality REITs, Apple Hospitality Two, Inc., Apple Hospitality Five, Inc. and Apple REIT Six, Inc., and also owned companies that provided services to
these entities. During 2004 and 2003, the company provided real estate acquisition and offering-related and other services to these entities and received payment of approximately $0.2 million for each year.



Liquidity and Capital Resources



Liquidity is the ability to meet present and future financial obligations
either through the sale of existing assets or by the acquisition of additional funds through working capital management. Both the coordination of asset and liability maturities and effective working capital management are important to the
maintenance of liquidity. The companys primary sources of liquidity are cash flows from operations as determined by rental rates, occupancy levels and property operating expenses; proceeds from its lines of credit; reinvestment of
distributions; and proceeds from secured debt.



The
companys demands for liquidity include normal property operating activities, payment of principal and interest on outstanding debt, capital expenditures, acquisition of apartment communities, payment of distributions and development costs.



The company has met and expects to continue to meet short-term
liquidity requirements, generally through the cash flow from operations, equity raised from its dividend reinvestment plan, and borrowings on its lines of credit. It is expected that these will be adequate to meet all normal property operating
expenses, payment of distributions, budgeted capital improvements, and scheduled principal and interest payments on debt in 2005. At December 31, 2004, the company had $29.7 million available under its lines of credit and $1.8 million in cash and
cash equivalents. In addition, the company had $7.2 million in reserves held by various lenders for capital expenditures, real estate taxes and insurance.



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The company expects to meet certain long-term liquidity requirements, such as scheduled debt maturities,
the repayment of financing on development activities, and possible property acquisitions, through secured borrowings, possible refinancing, disposition of certain assets that, in our evaluation, may no longer meet our investment requirements or
issuance of operating partnership units.



Our long-term ability
to pay distributions to our various stakeholders is dependent upon cash flows from our apartment communities. While we have substantial cash flow from our operations, on a short-term basis, our cash flow is less than our cash needs and we have had
to seek alternative funding sources. During 2004, our cash flow from operating activities was $40.0 million. Cash required to fund capital improvements to our apartment communities was $13.0 million. Distributions to our preferred stockholders,
operating partnership unit holders and common stockholders were approximately $46.5 million in 2004. In addition, sales of two properties, executed as a part of our long-term business strategy, also provided approximately $16.0 million.



In the event that there is an economic downturn and the cash flow from
operations are no longer adequate, the company has additional means, such as its borrowing availability on its lines of credit, to help meet its short term liquidity demands.



The company considers on a regular basis what level of distributions to common shareholders is appropriate, and there is no
assurance that the companys distribution to common shareholders will continue at the current level.



Operating Activities



For the year ended December 31, 2004, our net cash provided by operating activities was $40.0 million, compared to $41.7 million for the same period in
2003.



Investing Activities



For the year ended December 31, 2004, our net cash used in investing
activities was $3.5 million compared to $7.9 million for the same period in 2003. In 2004, our investing activities related to investments in an acquisition and in our existing apartment communities through capital expenditures and redevelopment, as
well dispositions of apartment communities.



Acquisitions



On May 28, 2003, the company completed the
acquisition of Merry Land, which owned nine apartment communities in South Carolina and Georgia containing 1,966 apartment homes, interests in two real estate joint ventures, two parcels of undeveloped land that the company plans to develop into
additional apartment homes, and a third party property management business. The acquisition was structured as a merger of Merry Land into a wholly owned qualified REIT subsidiary of the company. The merger qualified as a tax-free reorganization and
was accounted for under the purchase method of accounting. The company used various valuation methods to allocate the purchase price between land, buildings and improvements, equipment, identified intangible assets of in-place leases and debt
assumed. The purchase price was $159.4 million, which includes the issuance of equity, assumption of debt and the fair value adjustment to debt, and direct costs of the acquisition. Under the terms of the merger agreement, each Merry Land
shareholder received 1.818 of the companys common shares and 0.220 of the companys Series B Convertible Preferred Shares. A total of 5.0 million common shares and 0.6 million of the companys Series B Convertible Preferred Shares
were issued as a result of the merger. The Series B Convertible Preferred Shares met the conversion conditions and were converted to common shares on October 1, 2003. In addition, the company assumed approximately $90.6 million of Merry Lands
debt with a fair value of $110.5 million at the date of assumption. No goodwill was recorded as a result of this transaction.



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Real Estate under Development



The company has two development projects, which were assumed with the Merry
Land merger mentioned above. One is to be completed during 2005 and the other is to be completed during 2006. The companys share of estimated future cash expenditures to complete these projects will be funded through advances on future
construction loans.



Disposal of Investments



Dispositions



On July 22, 2004, the company sold two of its apartment communities
in Columbia, SC to Sterling American Property LP for $16.4 million and retained a 10% limited partnership interest in the entity. The company will continue to manage these apartment communities under a standard fee management contract. In accordance
with generally accepted accounting principles, since the sale was to an unrelated buyer, collection of the sales price has occurred and the company will not be required to support the operations of the property or its related obligations to an
extent greater than its proportionate interest, the company has recognized the part of the profit (90%) proportionate to the outside interests in the buyer at the date of sale. The resulting gain for financial reporting purposes was approximately
$3.4 million. The company has not classified this sale as discontinued operations in the statement of operations since the company continues to hold a 10% interest in the entity that owns the underlying apartment communities.



Discontinued Operations



During the first quarter of 2003, the company sold two apartment communities
containing a total of 395 apartment homes for a total sales price of $15.9 million with net proceeds of $15.0 million and recognized a gain of $1.9 million. As a result of the sales, the companys financial statements have been prepared with
these two apartment communities results of operations and the gain from sale isolated and shown as discontinued operations.



Financing Activities



For the year ended December 31, 2004, our net cash used in financing activities was $36.1 million compared to $33.8 million for the same period in 2003.
In 2004, our financing activities related to mortgage financings, payment of distributions, redemption of the Series A Convertible Preferred Shares and payment of our principal debt amortization.



The following is a summary of the companys financing activities for the
year ended December 31, 2004:



| |  |  | Financed $75.5 million in variable and fixed rate mortgage notes.
| | - |  | -----------------------------------------------------------------



| |  |  | Paid $1.5 million in deferred financing costs associated with the above financings.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Repaid $67.3 million in variable and fixed rate mortgage notes using proceeds from the above financings.
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Paid scheduled debt maturities in the amount of $4.7 million.
| | - |  | -------------------------------------------------------------



| |  |  | Net increase of $6.7 million on the companys $50 million secured revolving credit facility.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Issued $4.9 million of shares through the dividend reinvestment plan.
| | - |  | ---------------------------------------------------------------------



| |  |  | Paid distributions in the amount of $46.5 million to common and preferred shareholders and operating partnership unit holders.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Redeemed the Series A Convertible Preferred Shares in the amount of $3.2 million.
| | - |  | ---------------------------------------------------------------------------------



In September 2000, the Board of Directors authorized the repurchase of up to an additional $50 million of the companys
common shares. Under this authorization, the company has, as of December 31, 2004, repurchased 2.0 million common shares at an average price of $10.80 per share for a total cost of $21.3 million; however, no repurchases were made during 2004.



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At the request of various lenders, some of the companys financings were provided to new
wholly-owned subsidiaries of the company, which were formed for the special purpose of receiving the financing proceeds and holding the mortgaged apartment communities. The company continues to manage the apartment communities. All of these
financings are reflected on the audited consolidated financial statements of the company.



Capital Requirements



The company has an ongoing capital expenditure plan to fund its renovation program for its apartment communities. Capital expenditures include capital replacements, initial capital expenditures, and redevelopment enhancements. The company
anticipates funding these cash requirements as needed from a variety of sources including equity raised from its dividend reinvestment plan and debt provided by its lines of credit.



Capital resources are expected to grow with the future sale of the companys shares under the dividend reinvestment
plan and from cash flows from operations. Approximately 10.9% of all 2004 common stock distributions, or $4.9 million, was reinvested in additional common shares. In general, the companys liquidity and capital resources are believed to be
sufficient to meet its cash requirements during 2005.



The
company is operated as, and annually elects to be taxed as, a real estate investment trust under the Internal Revenue Code. As a result, the company has no provision for federal income taxes, and thus there is no effect on the companys
liquidity from federal income taxes. The company created a C-corporation which elected the taxable REIT subsidiary (TRS) status for financing purposes for one apartment community. The TRS is subject to federal, state and local income
taxes. For the years ended December 31, 2004 and 2003, the impact of this TRSs income taxes and related tax attributes was not material to the accompanying consolidated financial statements.



Contractual Obligations and Commitments



The table below sets forth a summary of our contractual obligations and
commitments that will impact our future liquidity (in thousands):



|               |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |         |  |   |          
|-------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------- |  | - | ---------
|               |  | 2005 |         | 2006 |   | 2007    |  | 2008 |        | 2009 |   | Thereafter |  | Total
|Interest       |  | $    | 48,844  |      | $ | 45,148  |  | $    | 38,957 |      | $ | 37,420     |  | $     | 34,089 |  | $ | 84,002  |  | $ | 288,460  
|Mortgages      |  |      | 89,871  |      |   | 120,215 |  |      | 19,747 |      |   | 57,370     |  |       | 34,209 |  |   | 485,572 |  |   | 806,984  
|Capital leases |  |      | 300     |      |   | 286     |  |      | 211    |      |   | 71         |  |       | 39     |  |   | 22      |  |   | 929      
|               |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |         |  |   |          
|               |  | $    | 139,015 |      | $ | 165,649 |  | $    | 58,915 |      | $ | 94,861     |  | $     | 68,337 |  | $ | 569,596 |  | $ | 1,096,373
|               |  |      |         |      |   |         |  |      |        |      |   |            |  |       |        |  |   |         |  |   |          



The company believes,
based on the performance of the apartment communities underlying mortgage loans maturing in 2005, that it could refinance these mortgages should the proposed merger with Colonial not occur.



The costs associated with the development projects are to be funded through
advances on the projects construction loans.



Operating Partnership



Effective
October 1, 2001, State Street, LLC and State Street I, LLC, each a North Carolina limited liability company (collectively, the Limited Partners), and the company, as the sole general partner, formed Cornerstone NC Operating Limited
Partnership, a Virginia limited partnership (the Limited Partnership). The company has approximately an 85% interest in the Limited Partnership. The Limited Partners are minority limited partners and are not otherwise related to the
company. The Limited Partners contributed and agreed to contribute property to the Limited Partnership in exchange for preferred and non-preferred operating partnership units. Beginning October 1, 2002, the Limited Partners became able to elect to
redeem a portion of the preferred operating partnership units. If the Limited Partners make the election, the company, at its option, will convert the preferred operating partnership units into either common shares of the company on a one-for-one
basis or cash in an amount per unit equal to the closing price of a common share of the company on the exercise date (or other specified price if there is no closing price on that date), subject to anti-dilution adjustments.



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On March 30, 2004, the Limited Partnership acquired an apartment community with 138 apartment homes for a
purchase price of $10.9 million. The total consideration for the transaction includes the assumption of $10.0 million in secured financing, the issuance of 20,000 non-preferred operating partnership units, totaling $0.2 million, and cash payments
totaling $0.7 million. The non-preferred operating partnership units converted into preferred operating partnership units on January 1, 2005.



During the first quarter of 2003, a total of 0.9 million preferred operating partnership units were converted into common shares on a one-to-one basis.
During 2003, 0.3 million non-preferred operating partnership units converted to preferred operating partnership units as certain lease-up and stabilization criteria were met. As of December 31, 2004, there were 1.8 million preferred operating
partnership units eligible for conversion into common shares on one-for-one basis or cash, at the companys option.



Critical Accounting Policies



The consolidated financial statements are prepared in accordance with generally accepted accounting principles, which require us to make estimates and
assumptions. We believe that the following critical accounting policies, among others, involve our more significant judgments and estimates used in the preparation of our financial statements.



Capital Expenditures



The company capitalized expenditures related to acquiring new assets,
materially enhancing the value of an existing asset or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing asset in ordinary operating condition, such as repairs and maintenance, are expensed
as incurred.



The company capitalizes interest, real estate
taxes, insurance and certain internal development and related overhead costs directly to the apartment community under development or major renovation. Interest is capitalized to these projects based upon the weighted average cumulative project
costs for each period multiplied by the companys borrowing costs on its line of credit, expressed as a percentage. The internal development and related overhead costs are capitalized to the these projects based upon the effort identifiable
with such projects. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance sheet as real estate under development. The company ceases the capitalization of such costs as
the apartment homes become substantially complete and available for occupancy.



The company capitalized $15.7 million of improvements to its various apartment communities during 2004. The asset preservation capital expenditures, including floor coverings, HVAC equipment, roofs, appliances,
siding, exterior painting, parking lots, and other non-revenue enhancing capital expenditures totaled $8.5 million. Revenue enhancing capital expenditures, including interior upgrades, gating and access systems totaled $4.8 million for 2004.
Redevelopment expenditures, including amenities that add a material new feature or revenue source at our acquired apartment communities, totaled $2.4 million. The company capitalized costs of $4.8 million in development costs for 2004. The
companys total non-real estate capital additions, such as computer software, computer equipment, furniture and fixtures and property improvements to the companys management offices and its corporate offices, was approximately $2.4
million and is reflected on the balance sheet in the other asset category.



The company is also required by various lenders to fund a replacement reserve in advance for capital improvements.



The companys capital improvement budget is reviewed continually and adjustments will be made if deemed necessary.



Real Estate AssetsImpairment Assessment



We periodically assess our real estate assets for possible permanent
impairment when certain events or changes in circumstances indicate that the carrying amount of real estate may not be recoverable. Management considers current market conditions and tenant credit analysis in determining whether the recoverability
of the



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carrying amount of an asset should be assessed. When an assessment is warranted, management determines if it is probable that the sum of the expected
undiscounted future cash flows over the expected holding period is less than the carrying amount of the property being assessed. If the undiscounted future cash flows are less than the carrying amount, then an impairment loss would be recognized
equal to the amount of the difference between the fair value of the property and its carrying amount. No impairment losses have been recorded to date.



Real Estate AssetsAllocation of Purchase Price



The company accounts for acquisitions utilizing the purchase method, and accordingly, the results of the acquisition
properties are included in the companys results of operations from the date of acquisition. The company allocates the purchase price to the acquired tangibles, consisting of land, building and improvements, and if material, identified
intangible assets and liabilities of above/below market leases and at-market leases in place based on their fair values. Allocation of fair value to real estate assets were based on internal management estimates on a property by property basis using
discounted cash flows using market capitalization rates. All liabilities with maturities in excess of one year assumed in connection with an acquisition are marked to market at the date of the acquisition using a market interest rate in effect at
that date for similar debt agreements with similar maturities. The resulting premium or discount is amortized into interest expense over the life of the related debt agreement using the effective interest method. Determinations of fair values used
in purchase price allocation are by their nature subjective and may have a significant impact on reported asset and liability balances in the consolidated balance sheets and in the reported amounts of depreciation expense and interest expense in the
consolidated statements of operations.



Rental Revenue
and Related Cost Recognition



Rental income and other
income are recorded on an accrual basis. Rental concessions and direct lease costs associated with lease origination are amortized on a straight-line basis over the terms of the respective leases. The companys apartment communities are leased
under lease agreements that, typically, have terms that do not exceed one year. Deferred rental concessions and direct lease costs were $2.1 million and $2.0 million at December 31, 2004 and 2003, respectively.



Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation 46, Consolidation of Variable Interest Entities. (FIN 46) which was revised in December 2003. The company has formed wholly-owned subsidiaries for financing purposes and such financing is reflected in the
consolidated financial statements. Effective January 1, 2004, the company adopted the provisions of FIN 46. The company did not identify any variable interest entities (VIEs) of which the company is the primary beneficiary, thus, the company was not
required to consolidate any VIEs.



On December 16, 2004, the
FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values, pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than July
1, 2005 by the company. The adoption of the statement is not anticipated to have a material impact on the companys financial results.



Market Risk Disclosure



The company is subject to changes in the fair market value of its fixed rate secured debt amounting to $573.4 million at December 31, 2004. If market
interest rates for fixed rate debt were 100 basis points higher at December 31, 2004, the fair value of fixed rate debt would decrease by $22.4 million to $551.0 million. If market interest rates for fixed rate debt were 100 basis points lower at
December 31, 2004, the fair value of fixed rate debt would have increased from $573.4 million to $602.7 million.



33



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##### Table of Contents

The company has market risk exposure to short-term interest rates from variable rate borrowings under its
existing secured lines of credit and variable rate secured debt. The existing secured lines of credit bear interest at LIBOR plus 1.575%. The company may utilize variable rate debt up to specified limits to total market capitalization. The company
has analyzed its interest rate risk exposure. If market interest rates for these types of credit facilities average 100 basis points more in 2005 than they did in 2004, and the companys secured lines of credit were at the maximum of $50
million, and the variable rate secured debt remained at $213.6 million, the companys interest expense would increase, and net income would decrease by $2.6 million. These amounts are determined by considering the impact of hypothetical
interest rates on the companys borrowing cost. These analyses do not consider the effects of the reduced overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would
likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the companys financial
structure.



Impact of Inflation



Substantially all of our leases are for a term of one year or less, which
enables us to realize increased rents upon renewal of existing leases or the beginning of new leases. The short-term nature of these leases generally serves to reduce our risk of the adverse inflation. Short-term leases and relatively consistent
demand allow rents, and therefore cash flow from the portfolio, to provide an attractive hedge against inflation.



Item 7A.Quantitative and Qualitative Disclosures About Market Risk



Information required by this item is included in Item 7. See Managements Discussion and Analysis of Financial Condition and Results of Operations of
this Report, which is hereby incorporated into this item by reference.



Item 8.Financial Statements and Supplementary Data



The financial statements of the company and report of independent registered public accounting firm required to be included in this item are set forth in
Item 15 of this report and are hereby incorporated into this item by reference.



|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------



None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------



Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the companys disclosure
controls and procedures as of the end of the period covered by this report. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the companys disclosure controls and procedures are
effective and that there have been no changes in the companys internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
companys internal control over financial reporting. Since that evaluation process was completed, there have been no significant changes in internal controls or in other factors that could significantly affect these controls.



The Sarbanes-Oxley Act of 2002 (the Act) imposed many
requirements regarding corporate governance and financial reporting. One requirement under Section 404 of the Act, beginning with this annual report, is for management to report on the companys internal controls over financial reporting and
for the companys independent registered public accountants to attest to that report. In late November 2004, the Securities and Exchange Commission issued an exemptive order providing a 45-day extension for the filing of the report and
attestation by eligible companies. The company has met the conditions set forth in the SECs exemptive order and has elected to utilize the 45-day extension. Therefore, this Form 10-K does not include the report and attestation.



|Item 9B. | Other Information
|-------- | -----------------



None.



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##### Table of Contents

PART III



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------



For information with respect to the companys directors and director nominees see the information under Ownership
of Equity Securities and Election of Directors in the companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference. For information with respect to the
companys executive officers see Executive Officers in the companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



|Item 11. | Executive Compensation
|-------- | ----------------------



For information with respect to compensation of the companys executive officers and directors, see the information under Compensation of
Executive Officers and Compensation of Directors in the companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------



See the information under Ownership of Equity Securities in the
companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



For information on certain relationships and related transactions, see the information under Certain Relationships and Agreements in the
companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------



For information with respect to certain principal accountant fees and services, see the information under the caption Independent Public
Accountants in the companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



For information with respect to the pre-approval policies for audit and non-audit services, see the information under the
same caption in the companys Proxy Statement for its 2005 Annual Meeting of Shareholders, which information is hereby incorporated herein by reference.



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PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------



|(a) |  | The following documents are filed as part of this Report
|--- |  | --------------------------------------------------------



| | 1. |  | Financial Statements.
| | -- |  | ---------------------



See Index to Consolidated Financial Statements and Schedule on page 38 of this Report.



| | 2. |  | Financial Statement Schedule.
| | -- |  | -----------------------------



See Index to Consolidated Financial Statements and Schedule on page 38 of this Report. All other schedules are omitted because they are not required, are
inapplicable, or the required information is included in the financial statements or notes thereto.



| | 3. |  | Exhibits
| | -- |  | --------



Incorporated herein by reference are the exhibits listed under Exhibit Index on page 68 of this report.



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



|                                      |  |                                                                                                                            |  |  |  |  |  |               
|------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | --------------
|CORNERSTONE REALTY INCOME TRUST, INC. |  |                                                                                                                            |  | 
|                                      |  |                                                                                                                            |  | 
|By:                                   |  | /s/    GLADE M. KNIGHT                                                                                                     |  |  |  |  |  | March 16, 2005
|                                      |  | Glade M. Knight                                                                                                            |  |  |  |  |  |               
|                                      |  | Chairman of the Board and Chief Executive Officer                                                                          |  |  |  |  |  |               
|                                      |  |                                                                                                                            |  | 
|By:                                   |  | /s/    STANLEY J. OLANDER, JR.                                                                                             |  |  |  |  |  | March 16, 2005
|                                      |  | Stanley J. Olander, Jr.                                                                                                    |  |  |  |  |  |               
|                                      |  | President and Chief Financial Officer (in such capacity, the principal financial officer and principal accounting
officer) |  |  |  |  |  |               



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.



|                                                      |  |                                                             |  |               
|----------------------------------------------------- |  | ----------------------------------------------------------- |  | --------------
|Signature                                             |  | Capacities                                                  |  | Date          
|                                                      |  |                                                            
|/s/    GLADE M. KNIGHTGlade M. Knight                 |  | Director, Chairman of the Board and Chief Executive Officer |  | March 16, 2005
|                                                      |  |                                                            
|/s/    STANLEY J. OLANDER,
JR.Stanley J. Olander,
Jr. |  | Director, President and Chief Financial Officer             |  | March 16, 2005
|                                                      |  |                                                            
|/s/    GLENN W. BUNTING,
JR.Glenn W. Bunting,
Jr.     |  | Director                                                    |  | March 16, 2005
|                                                      |  |                                                            
|/s/    KENT W. COLTONKent W. Colton                   |  | Director                                                    |  | March 16, 2005
|                                                      |  |                                                            
|/s/    LESLIE A.
GRANDISLeslie A.
Grandis             |  | Director                                                    |  | March 16, 2005
|                                                      |  |                                                            
|/s/    PENELOPE W.
KYLEPenelope W.
Kyle               |  | Director                                                    |  | March 16, 2005
|                                                      |  |                                                            
|/s/    HARRY S.
TAUBENFELDHarry S.
Taubenfeld         |  | Director                                                    |  | March 16, 2005
|                                                      |  |                                                            
|/s/    MARTIN
ZUCKERBRODMartin
Zuckerbrod             |  | Director                                                    |  | March 16, 2005
|                                                      |  |                                                            
|/s/    W. TENNENT
HOUSTONW. Tennent
Houston           |  | Director                                                    |  | March 16, 2005
|                                                      |  |                                                            
|/s/    ROBERT A. GARY
IVRobert A Gary IV              |  | Director                                                    |  | March 16, 2005



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CORNERSTONE REALTY INCOME TRUST, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE



|                                                                                             |  |     
|-------------------------------------------------------------------------------------------- |  | ----
|                                                                                             |  | Page
|Report of Independent Registered Public Accounting FirmErnst & Young LLP                    |  | 39  
|                                                                                             | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                 |  | 40  
|                                                                                             | 
|Consolidated Statements of OperationsYears ended December 31, 2004, 2003 and 2002           |  | 41  
|                                                                                             | 
|Consolidated Statements of Shareholders EquityYears ended December 31, 2004, 2003 and 2002 |  | 42  
|                                                                                             | 
|Consolidated Statements of Cash FlowsYears ended December 31, 2004, 2003 and 2002           |  | 43  
|                                                                                             | 
|Notes to Consolidated Financial Statements                                                   |  | 44  
|                                                                                             | 
|Financial Statement Schedule                                                                 |  |     
|                                                                                             | 
|Schedule IIIReal Estate and Accumulated Depreciation                                        |  | 60  



All other financial
statement schedules have been omitted because they are not applicable or not required or because the required information is included elsewhere in the financial statements or notes thereto.



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

Cornerstone Realty Income Trust, Inc.



We have audited the accompanying consolidated balance sheets of Cornerstone Realty Income Trust, Inc. as of December 31,
2004 and 2003, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the
Index at Item 15. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cornerstone Realty Income Trust, Inc. at December 31, 2004 and 2003, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



/S/  ERNST & YOUNG LLP



Richmond, Virginia

March 14, 2005



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                       |  |                                       |           |   |      |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                       |  | December 31,                          |          
|                                                                                                                                                                                       |  | 2004                                  |           |   | 2003 |  
|                                                                                                                                                                                       |  | In thousands, except per share dollar |          
|ASSETS                                                                                                                                                                                 |  |                                       |           |   |      |   |           |  
|Investment in rental property:                                                                                                                                                         |  |                                       |           |   |      |   |           |  
|Land                                                                                                                                                                                   |  | $                                     | 159,944   |   |      | $ | 160,192   |  
|Buildings and property improvements                                                                                                                                                    |  |                                       | 1,109,055 |   |      |   | 1,103,043 |  
|Furniture and fixtures and other                                                                                                                                                       |  |                                       | 40,881    |   |      |   | 38,735    |  
|Real estate under development                                                                                                                                                          |  |                                       | 13,454    |   |      |   | 5,450     |  
|                                                                                                                                                                                       |  |                                       |           |   |      |   |           |  
|                                                                                                                                                                                       |  |                                       | 1,323,334 |   |      |   | 1,307,420 |  
|Less accumulated depreciation                                                                                                                                                          |  |                                       | (272,227  | ) |      |   | (224,535  | )
|                                                                                                                                                                                       |  |                                       |           |   |      |   |           |  
|                                                                                                                                                                                       |  |                                       | 1,051,107 |   |      |   | 1,082,885 |  
|                                                                                                                                                                                       |  |                                      
|Cash and cash equivalents                                                                                                                                                              |  |                                       | 1,766     |   |      |   | 1,393     |  
|Prepaid expenses                                                                                                                                                                       |  |                                       | 6,225     |   |      |   | 5,334     |  
|Deferred financing costs, net                                                                                                                                                          |  |                                       | 5,517     |   |      |   | 5,924     |  
|Investment in real estate joint ventures                                                                                                                                               |  |                                       | 4,427     |   |      |   | 2,649     |  
|Other assets                                                                                                                                                                           |  |                                       | 22,306    |   |      |   | 26,257    |  
|                                                                                                                                                                                       |  |                                       |           |   |      |   |           |  
|Total Assets                                                                                                                                                                           |  | $                                     | 1,091,348 |   |      | $ | 1,124,442 |  
|                                                                                                                                                                                       |  |                                       |           |   |      |   |           |  
|LIABILITIES and SHAREHOLDERS EQUITY                                                                                                                                                   |  |                                       |           |   |      |   |           |  
|Liabilities                                                                                                                                                                            |  |                                       |           |   |      |   |           |  
|Notes payable-secured                                                                                                                                                                  |  |                                       | 822,081   |   |      |   | 801,754   |  
|Distributions payable                                                                                                                                                                  |  |                                       |          |   |      |   | 76        |  
|Accounts payable and accrued expenses                                                                                                                                                  |  |                                       | 16,021    |   |      |   | 14,950    |  
|Rents received in advance                                                                                                                                                              |  |                                       | 945       |   |      |   | 884       |  
|Tenant security deposits                                                                                                                                                               |  |                                       | 2,184     |   |      |   | 1,889     |  
|                                                                                                                                                                                       |  |                                       |           |   |      |   |           |  
|Total Liabilities                                                                                                                                                                      |  |                                       | 841,231   |   |      |   | 819,553   |  
|Minority interest of unit holders in operating partnership                                                                                                                             |  |                                       | 17,261    |   |      |   | 18,884    |  
|                                                                                                                                                                                       |  |                                      
|Shareholders equity                                                                                                                                                                   |  |                                       |           |   |      |   |           |  
|Preferred stock, no par value, authorized 25,000 shares; $25 liquidation preference, Series A Cumulative Convertible Redeemable; issued and
outstanding 0 and 127 shares, respectively |  |                                       |          |   |      |   | 2,680     |  
|Common stock, no par value, authorized 100,000 shares; issued and outstanding 56,328 and 55,534 shares, respectively                                                                   |  |                                       | 545,877   |   |      |   | 538,969   |  
|Deferred compensation                                                                                                                                                                  |  |                                       | (193      | ) |      |   | (456      | )
|Distributions greater than net income                                                                                                                                                  |  |                                       | (312,387  | ) |      |   | (255,188  | )
|Accumulated other comprehensive loss                                                                                                                                                   |  |                                       | (441      | ) |      |   |          |  
|                                                                                                                                                                                       |  |                                       |           |   |      |   |           |  
|Total Shareholders Equity                                                                                                                                                             |  |                                       | 232,856   |   |      |   | 286,005   |  
|                                                                                                                                                                                       |  |                                       |           |   |      |   |           |  
|Total Liabilities and Shareholders Equity                                                                                                                                             |  | $                                     | 1,091,348 |   |      | $ | 1,124,442 |  
|                                                                                                                                                                                       |  |                                       |           |   |      |   |           |  



See accompanying notes
to consolidated financial statements.



40



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                   |  | Years Ended December 31,            |        
|                                                                                                                                   |  | 2004                                |         |   | 2003 |   |         | 2002 | 
|                                                                                                                                   |  | In thousands, except per share data |        
|REVENUE:                                                                                                                           |  |                                     |         |   |      |   |         |      |  |   |         |  
|Rental income                                                                                                                      |  | $                                   | 171,339 |   |      | $ | 163,059 |      |  | $ | 153,295 |  
|Fee management and other property income                                                                                           |  |                                     | 11,153  |   |      |   | 8,593   |      |  |   | 6,571   |  
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|Total revenues                                                                                                                     |  |                                     | 182,492 |   |      |   | 171,652 |      |  |   | 159,866 |  
|EXPENSES:                                                                                                                          |  |                                     |         |   |      |   |         |      |  |   |         |  
|Property and maintenance                                                                                                           |  |                                     | 54,376  |   |      |   | 50,930  |      |  |   | 44,907  |  
|Taxes and insurance                                                                                                                |  |                                     | 25,529  |   |      |   | 23,550  |      |  |   | 20,727  |  
|Property management                                                                                                                |  |                                     | 5,426   |   |      |   | 4,102   |      |  |   | 3,798   |  
|General and administrative                                                                                                         |  |                                     | 4,630   |   |      |   | 3,824   |      |  |   | 3,904   |  
|Depreciation and amortization of real estate assets                                                                                |  |                                     | 54,783  |   |      |   | 52,794  |      |  |   | 45,157  |  
|Severance costs and other organizational charges                                                                                   |  |                                     | 760     |   |      |   |        |      |  |   |        |  
|Other depreciation                                                                                                                 |  |                                     | 110     |   |      |   | 23      |      |  |   | 24      |  
|Fee management and other                                                                                                           |  |                                     | 2,161   |   |      |   | 239     |      |  |   | 251     |  
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|Total expenses                                                                                                                     |  |                                     | 147,775 |   |      |   | 135,462 |      |  |   | 118,768 |  
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|                                                                                                                                   |  |                                     | 34,717  |   |      |   | 36,190  |      |  |   | 41,098  |  
|Interest income                                                                                                                    |  |                                     | 40      |   |      |   | 274     |      |  |   | 31      |  
|Interest expense                                                                                                                   |  |                                     | (46,090 | ) |      |   | (45,896 | )    |  |   | (41,684 | )
|Expenses associated with the proposed Colonial Properties Trust transaction                                                        |  |                                     | (4,161  | ) |      |   |        |      |  |   |        |  
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|Loss from continuing operations before gain on sales of investments and minority interest of unit holders in operating
partnership |  |                                     | (15,494 | ) |      |   | (9,432  | )    |  |   | (555    | )
|Gain on sales of investments                                                                                                       |  |                                     | 3,428   |   |      |   |        |      |  |   |        |  
|Minority interest of unit holders in operating partnership                                                                         |  |                                     | 360     |   |      |   | 262     |      |  |   | 36      |  
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|Net loss from continuing operations                                                                                                |  |                                     | (11,706 | ) |      |   | (9,170  | )    |  |   | (519    | )
|Discontinued operations                                                                                                            |  |                                     |         |   |      |   |         |      |  |   |         |  
|(Loss) income from discontinued operations                                                                                         |  |                                     |        |   |      |   | (15     | )    |  |   | 739     |  
|Gain on sales of investments                                                                                                       |  |                                     |        |   |      |   | 1,887   |      |  |   |        |  
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|Net (loss) income                                                                                                                  |  |                                     | (11,706 | ) |      |   | (7,298  | )    |  |   | 220     |  
|Distributions to preferred shareholders                                                                                            |  |                                     | (294    | ) |      |   | (303    | )    |  |   | (303    | )
|Excess consideration paid over book value to preferred shareholders                                                                |  |                                     | (505    | ) |      |   |        |      |  |   |        |  
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|Net loss available to common shareholders                                                                                          |  | $                                   | (12,505 | ) |      | $ | (7,601  | )    |  | $ | (83     | )
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|Net loss per common share-basic and diluted from continuing operations                                                             |  | $                                   | (0.22   | ) |      | $ | (0.18   | )    |  | $ | (0.02   | )
|Net income per common share-basic and diluted from discontinued operations                                                         |  | $                                   |        |   |      | $ | 0.04    |      |  | $ | 0.02    |  
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  
|Net (loss) income per common share-basic and diluted                                                                               |  | $                                   | (0.22   | ) |      | $ | (0.14   | )    |  | $ |        |  
|                                                                                                                                   |  |                                     |         |   |      |   |         |      |  |   |         |  



See accompanying notes
to consolidated financial statements.



41



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



|                                                                                            |  |                                     |   |  |                 |         |   |                       |      |   |                                              |   |        |                                      |  |   |                            |   |  |   |          |   |  |   |      |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ----------------------------------- | - |  | --------------- | ------- | - | --------------------- | ---- | - | -------------------------------------------- | - | ------ | ------------------------------------ |  | - | -------------------------- | - |  | - | -------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                                            |  | Common Stock                        |   |  | Preferred Stock |         |   | Deferred Compensation |      |   | Distributions (greater) less than Net Income |   |        | Accumulated Other Comprehensive Loss |  |   | Total Shareholders Equity |  
|                                                                                            |  | Number of Shares                    |   |  | Amount          |         |   | Number of Shares      |      |   | Amount                                       |   |        |                                      |  |  
|                                                                                            |  | In thousands, except per share data |  
|                                                                                            |  |                                     |   |  |                 |         |   |                      
|Balance at December 31, 2001                                                                |  | 47,665                              |   |  | $               | 480,529 |   |                       | 128  |   |                                              | $ | 2,695  |                                      |  | $ | (685                       | ) |  | $ | (148,705 | ) |  | $ |     |   |  | $ | 333,834 |  
|                                                                                            |  |                                     |   |  |                 |         |   |                      
|Net income                                                                                  |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | 220      |   |  |   |     |   |  |   | 220     |  
|Cash distributions declared to common shareholders ($1.12 per share)                        |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (53,482  | ) |  |   |     |   |  |   | (53,482 | )
|Cash distributions for Series A Convertible Preferred Shares                                |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (304     | ) |  |   |     |   |  |   | (304    | )
|Exercise of stock options                                                                   |  | 18                                  |   |  |                 | 179     |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | 179     |  
|Purchase of common stock                                                                    |  | (36                                 | ) |  |                 | (367    | ) |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | (367    | )
|Preferred stock converted to common stock                                                   |  | 1                                   |   |  |                 | 15      |   |                       | (1   | ) |                                              |   | (15    | )                                    |  |   |                           |   |  |   |         |   |  |   |     |   |  |   |        |  
|Restricted stock grants                                                                     |  | 17                                  |   |  |                 | 190     |   |                       |     |   |                                              |   |       |                                      |  |   | (190                       | ) |  |   |         |   |  |   |     |   |  |   |        |  
|Amortization of deferred compensation                                                       |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   | 237                        |   |  |   |         |   |  |   |     |   |  |   | 237     |  
|Shares issued through dividend reinvestment plan                                            |  | 696                                 |   |  |                 | 6,757   |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | 6,757   |  
|                                                                                            |  |                                     |   |  |                 |         |   |                       |      |   |                                              |   |        |                                      |  |   |                            |   |  |   |          |   |  |   |      |   |  |   |         |  
|                                                                                            |  |                                     |   |  |                 |         |   |                      
|Balance at December 31, 2002                                                                |  | 48,361                              |   |  |                 | 487,303 |   |                       | 127  |   |                                              |   | 2,680  |                                      |  |   | (638                       | ) |  |   | (202,271 | ) |  |   |     |   |  |   | 287,074 |  
|                                                                                            |  |                                     |   |  |                 |         |   |                      
|Net loss                                                                                    |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (7,298   | ) |  |   |     |   |  |   | (7,298  | )
|Cash distributions declared to common shareholders ($.88 per share)                         |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (45,316  | ) |  |   |     |   |  |   | (45,316 | )
|Cash distributions for Series A Convertible Preferred Shares                                |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (303     | ) |  |   |     |   |  |   | (303    | )
|Purchase of common stock                                                                    |  | (26                                 | ) |  |                 | (190    | ) |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | (190    | )
|Issuance of common shares in connection with the acquisition of Merry Land Properties, Inc. |  | 4,993                               |   |  |                 | 36,147  |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | 36,147  |  
|Issuance of Series B Convertible Preferred Shares                                           |  |                                    |   |  |                 |        |   |                       | 605  |   |                                              |   | 3,922  |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | 3,922   |  
|Issuance of common shares through conversion of Series B Convertible Preferred Shares       |  | 605                                 |   |  |                 | 3,922   |   |                       | (605 | ) |                                              |   | (3,922 | )                                    |  |   |                           |   |  |   |         |   |  |   |     |   |  |   |        |  
|Conversion of minority interest of unit holders in operating partnership                    |  | 887                                 |   |  |                 | 6,326   |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | 6,326   |  
|Restricted stock grants                                                                     |  | 4                                   |   |  |                 | 33      |   |                       |     |   |                                              |   |       |                                      |  |   | (33                        | ) |  |   |         |   |  |   |     |   |  |   |        |  
|Amortization of deferred compensation                                                       |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   | 215                        |   |  |   |         |   |  |   |     |   |  |   | 215     |  
|Shares issued through dividend reinvestment plan                                            |  | 710                                 |   |  |                 | 5,428   |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | 5,428   |  
|                                                                                            |  |                                     |   |  |                 |         |   |                       |      |   |                                              |   |        |                                      |  |   |                            |   |  |   |          |   |  |   |      |   |  |   |         |  
|                                                                                            |  |                                     |   |  |                 |         |   |                      
|Balance at December 31, 2003                                                                |  | 55,534                              |   |  |                 | 538,969 |   |                       | 127  |   |                                              |   | 2,680  |                                      |  |   | (456                       | ) |  |   | (255,188 | ) |  |   |     |   |  |   | 286,005 |  
|                                                                                            |  |                                     |   |  |                 |         |   |                      
|Comprehensive Loss                                                                          |  |                                     |   |  |                 |         |   |                       |      |   |                                              |   |        |                                      |  |   |                            |   |  |   |          |   |  |   |      |   |  |   |         |  
|Net loss                                                                                    |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (11,706  | ) |  |   |     |   |  |   | (11,706 | )
|Other comprehensive income                                                                  |  |                                     |   |  |                 |         |   |                       |      |   |                                              |   |        |                                      |  |   |                            |   |  |   |          |   |  |   |      |   |  |   |         |  
|Unrealized loss on derivative financial instruments                                         |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   | (441 | ) |  |   | (441    | )
|                                                                                            |  |                                     |   |  |                 |         |   |                       |      |   |                                              |   |        |                                      |  |   |                            |   |  |   |          |   |  |   |      |   |  |   |         |  
|Comprehensive Income                                                                        |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (11,706  | ) |  |   | (441 | ) |  |   | (12,147 | )
|                                                                                            |  |                                     |   |  |                 |         |   |                       |      |   |                                              |   |        |                                      |  |   |                            |   |  |   |          |   |  |   |      |   |  |   |         |  
|Cash distributions declared to common shareholders ($.80 per share)                         |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (44,694  | ) |  |   |     |   |  |   | (44,694 | )
|Cash distributions for Series A Convertible Preferred Shares                                |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (294     | ) |  |   |     |   |  |   | (294    | )
|Issuance of common shares                                                                   |  | 250                                 |   |  |                 | 2,030   |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | 2,030   |  
|Redemption of Series A Convertible Preferred Shares                                         |  |                                    |   |  |                 |        |   |                       | (127 | ) |                                              |   | (2,680 | )                                    |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | (2,680  | )
|Excess consideration paid over book value for preferred stock redemption                    |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   | (505     | ) |  |   |     |   |  |   | (505    | )
|Restricted stock grants                                                                     |  | 3                                   |   |  |                 | 28      |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | 28      |  
|Amortization of deferred compensation                                                       |  |                                    |   |  |                 |        |   |                       |     |   |                                              |   |       |                                      |  |   | 263                        |   |  |   |         |   |  |   |     |   |  |   | 263     |  
|Shares issued through dividend reinvestment plan                                            |  | 541                                 |   |  |                 | 4,850   |   |                       |     |   |                                              |   |       |                                      |  |   |                           |   |  |   |         |   |  |   |     |   |  |   | 4,850   |  
|                                                                                            |  |                                     |   |  |                 |         |   |                       |      |   |                                              |   |        |                                      |  |   |                            |   |  |   |          |   |  |   |      |   |  |   |         |  
|                                                                                            |  |                                     |   |  |                 |         |   |                      
|Balance at December 31, 2004                                                                |  | 56,328                              |   |  | $               | 545,877 |   |                       |     |   |                                              | $ |       |                                      |  | $ | (193                       | ) |  | $ | (312,387 | ) |  | $ | (441 | ) |  | $ | 232,856 |  
|                                                                                            |  |                                     |   |  |                 |         |   |                       |      |   |                                              |   |        |                                      |  |   |                            |   |  |   |          |   |  |   |      |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



42



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                 |  | Years Ended December 31, |        
|                                                                                 |  | 2004                     |         |   | 2003 |   |         | 2002 | 
|                                                                                 |  | In thousands             |        
|Cash flow from operating activities:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net (loss) income                                                                |  | $                        | (11,706 | ) |      | $ | (7,298  | )    |  | $ | 220     |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                          |         |   |      |   |         |      |  |   |         |  
|Gain on sales of rental property                                                 |  |                          | (3,428  | ) |      |   | (1,887  | )    |  |   |        |  
|Depreciation and amortization                                                    |  |                          | 54,893  |   |      |   | 52,956  |      |  |   | 46,045  |  
|Severance costs and organizational charge                                        |  |                          | 650     |   |      |   |        |      |  |   |        |  
|Minority interest of unit holders in operating partnership                       |  |                          | (360    | ) |      |   | (262    | )    |  |   | (36     | )
|Amortization of deferred compensation                                            |  |                          | 263     |   |      |   | 182     |      |  |   | 237     |  
|Amortization of deferred financing costs                                         |  |                          | 1,358   |   |      |   | 1,320   |      |  |   | 835     |  
|Amortization of mortgage notes payable premium                                   |  |                          | (3,288  | ) |      |   | (2,161  | )    |  |   | (357    | )
|Changes in operating assets and liabilities:                                     |  |                          |         |   |      |   |         |      |  |   |         |  
|Operating assets                                                                 |  |                          | 659     |   |      |   | (1,229  | )    |  |   | 888     |  
|Operating liabilities                                                            |  |                          | 985     |   |      |   | 57      |      |  |   | (1,017  | )
|                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                        |  |                          | 40,026  |   |      |   | 41,678  |      |  |   | 46,815  |  
|Cash flow from investing activities:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Acquisitions of rental property, net of debt assumed                             |  |                          | (281    | ) |      |   | (4,129  | )    |  |   | (20,100 | )
|Development of real estate assets                                                |  |                          | (4,790  | ) |      |   | (737    | )    |  |   | (1,272  | )
|Major renovations                                                                |  |                          | (2,715  | ) |      |   | (2,732  | )    |  |   | (3,868  | )
|Capital improvements                                                             |  |                          | (12,992 | ) |      |   | (13,691 | )    |  |   | (12,215 | )
|Net funding of real estate reserve for replacement                               |  |                          | 1,220   |   |      |   | (1,613  | )    |  |   | 984     |  
|Net proceeds from the sale of rental property                                    |  |                          | 16,027  |   |      |   | 15,018  |      |  |   |        |  
|                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                            |  |                          | (3,531  | ) |      |   | (7,884  | )    |  |   | (36,471 | )
|Cash flow from financing activities:                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Proceeds (repayments) from/of short-term borrowings, net                         |  |                          |        |   |      |   | (77,913 | )    |  |   | 22,913  |  
|Proceeds (repayments) from/borrowings on secured line of credit, net             |  |                          | 6,664   |   |      |   | 13,604  |      |  |   |        |  
|Proceeds from secured notes payable                                              |  |                          | 75,495  |   |      |   | 102,883 |      |  |   | 12,600  |  
|Repayment of secured notes payable                                               |  |                          | (71,997 | ) |      |   | (27,535 | )    |  |   | (3,397  | )
|Payment of deferred financing costs                                              |  |                          | (1,468  | ) |      |   | (2,726  | )    |  |   | (562    | )
|Shares issued through dividend reinvestment plan and exercise of stock options   |  |                          | 4,878   |   |      |   | 5,400   |      |  |   | 6,936   |  
|Purchase of common stock                                                         |  |                          |        |   |      |   | (190    | )    |  |   | (367    | )
|Cash payment for redemption of Series A Convertible Preferred Shares             |  |                          | (3,185  | ) |      |   |        |      |  |   |        |  
|Cash distributions to operating partnership unit holders                         |  |                          | (1,446  | ) |      |   | (1,685  | )    |  |   | (1,957  | )
|Cash distributions paid to preferred shareholders                                |  |                          | (369    | ) |      |   | (303    | )    |  |   | (304    | )
|Cash distributions paid to common shareholders                                   |  |                          | (44,694 | ) |      |   | (45,316 | )    |  |   | (53,482 | )
|                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                            |  |                          | (36,122 | ) |      |   | (33,781 | )    |  |   | (17,620 | )
|Increase (decrease) in cash and cash equivalents                                 |  |                          | 373     |   |      |   | 13      |      |  |   | (7,276  | )
|Cash and cash equivalents, beginning of year                                     |  |                          | 1,393   |   |      |   | 1,380   |      |  |   | 8,656   |  
|                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of year                                           |  | $                        | 1,766   |   |      | $ | 1,393   |      |  | $ | 1,380   |  
|                                                                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Supplemental information:                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash paid for interest                                                           |  | $                        | 49,036  |   |      | $ | 46,209  |      |  | $ | 40,714  |  
|Non-cash transactions:                                                           |  |                          |         |   |      |   |         |      |  |   |         |  
|Real estate assets acquired                                                      |  |                          | 10,902  |   |      |   | 147,437 |      |  |   | 26,019  |  
|Assumption of mortgage notes                                                     |  |                          | 10,000  |   |      |   | 90,568  |      |  |   | 16,000  |  
|Operating assets acquired                                                        |  |                          |        |   |      |   | 9,048   |      |  |   |        |  
|Operating liabilities acquired                                                   |  |                          |        |   |      |   | 2,538   |      |  |   |        |  
|Fair value adjustment on mortgage notes                                          |  |                          |        |   |      |   | 19,950  |      |  |   |        |  
|Issuance of common stock                                                         |  |                          | 2,030   |   |      |   | 36,285  |      |  |   |        |  
|Issuance of preferred stock                                                      |  |                          |        |   |      |   | 3,930   |      |  |   |        |  
|Issuance of operating partnership units                                          |  |                          | 182     |   |      |   |        |      |  |   | 10,019  |  
|Investment in real estate joint ventures                                         |  |                          | 2,030   |   |      |   |        |      |  |   |        |  
|Conversion of operating partnership units into common stock                      |  |                          |        |   |      |   | 6,326   |      |  |   |        |  
|Capital leases                                                                   |  |                          | 49      |   |      |   | 118     |      |  |   | 1,148   |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS



Note
1    General Information and Summary of Significant Accounting Policies



Business



Cornerstone
Realty Income Trust, Inc. (together with its subsidiaries, the company), a Virginia corporation, is an owner-operator of one business segment consisting of residential apartment communities in the southern regions of the United States.
As of December 31, 2004, the company, as a general partner, has approximately an 85% interest in and consolidates Cornerstone NC Operating Limited Partnership.



All significant intercompany accounts and transactions have been eliminated in consolidation. The companys common stock trades on the New York
Stock Exchange under the ticker symbol TCR.



Cash and Cash
Equivalents



Cash equivalents include highly liquid
investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value.



Investment in Rental Property



The investment in rental property is recorded at cost, net of depreciation. The company records impairment losses on rental property used in operations if
indicators of impairment are present and the undiscounted cash flows estimated to be generated by the respective properties are less than their carrying amount. Impairment losses are measured as the difference between the assets fair value
less cost to sell, and its carrying value. No impairment losses have been recorded to date.



Repairs and maintenance costs are expensed as incurred while significant improvements, renovations and replacements are capitalized. The company capitalizes expenditures related to acquiring new assets, materially
enhancing the value of an existing asset or substantially extending the useful life of an existing asset. The companys capital expenditures include floor coverings, HVAC equipment, roofs, appliances, siding, exterior painting, parking lots,
interior upgrades, gating and access systems. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which are 27.5 years for buildings, range from 10 to 27.5 years for major improvements and range
from three to seven years for furniture and fixtures.



Development



Development projects and related carrying costs are
capitalized. The costs of development projects include interest, real estate taxes, insurance and certain internal development and related overhead costs directly related to the apartment community under development or major renovation. Interest is
capitalized to development projects based upon the weighted average cumulative project costs for each period multiplied by the companys borrowing costs on its lines of credit, expressed as a percentage. The internal development and related
overhead costs are capitalized to the development projects based upon the effort identifiable with such projects. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance
sheet as real estate under development. The company ceases the capitalization of such costs as the apartment homes become substantially complete and available for occupancy.



Income Recognition



Rental income, interest, and other income are recorded on an accrual basis. Rental concessions are recognized on a straight-line basis over the terms of
the respective leases. The companys apartment communities are leased under lease agreements that, typically, have terms that do not exceed one year. Deferred rental concessions were $1.2 million and $1.0 million at December 31, 2004 and 2003,
respectively.



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



The companys third party management contracts provide for reimbursement for employee related
costs which the company recognizes as revenue. Also, in accordance with EITF 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred, certain reimbursements received from the
third parties for out-of-pocket expenses are characterized as revenue in the statements of operations rather that as a reduction of the expenses incurred. Since the company is the primary obligor, has supplier discretion and bears credit risk for
such expenses, the company records reimbursement revenue for such out-of-pocket expenses. Reimbursement revenue is recorded when the underlying reimbursable costs are incurred.



Deferred Financing and Lease Origination Costs



Deferred financing costs consist of loan fees and related expenses which are amortized on a straight-line basis that
approximates the effective interest method over the terms of the related notes. Accumulated amortization of deferred financing costs totaled $3.4 million and $2.2 million in 2004 and 2003, respectively.



The company defers direct costs incurred to originate a lease and amortizes
the costs over the life of the lease which on an average is one year. Deferred lease origination costs were $0.9 and $1.0 million at December 31, 2004 and 2003, respectively.



Stock Incentive Plans



The company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion 25, Accounting for Stock
Issued to Employees (APB No. 25) and related Interpretations in accounting for its employee stock options. As discussed in Note 8, the alternative fair value accounting provided for under Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) requires use of option valuation models that were not developed for use in valuing employee stock options.



Under APB No. 25, because the exercise price of the companys
employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.



The company granted 89,696, 69,550 and 57,612 options to purchase shares during the years ended December 31, 2004, 2003 and 2002, respectively. Generally,
the companys options to purchase shares are exercisable after six months after the date of grant, therefore the compensation expense would occur in the period granted. The following information about stock-based employee compensation costs
reconciles the difference of accounting for employee stock based compensation (stock options and restricted stock) under the intrinsic value method of APB No. 25 and related interpretations and the fair value method prescribed under SFAS No. 123 (in
thousands):



|                                                                                                          |  |      |         |   |      |   |        |      |  |   |      |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ---- | -
|                                                                                                          |  | 2004 |         |   | 2003 |   |        | 2002 | 
|Net (loss) income, as reported                                                                            |  | $    | (11,706 | ) |      | $ | (7,298 | )    |  | $ | 220  |  
|Add:  Stock-basedemployee compensation expense included in reported net income                            |  |      | 263     |   |      |   | 215    |      |  |   | 237  |  
|Deduct:  Stock-basedemployee compensation expense determined under fair value based method for all awards |  |      | (267    | ) |      |   | (219   | )    |  |   | (239 | )
|                                                                                                          |  |      |         |   |      |   |        |      |  |   |      |  
|Pro forma net (loss) income as if the fair value method had been applied to all option grants             |  | $    | (11,710 | ) |      | $ | (7,302 | )    |  | $ | 218  |  
|                                                                                                          |  |      |         |   |      |   |        |      |  |   |      |  
|Loss per common share                                                                                     |  |      |         |   |      |   |        |      |  |   |      |  
|Basic-as reported                                                                                         |  | $    | (0.22   | ) |      | $ | (0.14  | )    |  | $ |     |  
|Basic-pro forma                                                                                           |  | $    | (0.22   | ) |      | $ | (0.14  | )    |  | $ |     |  
|Diluted-as reported                                                                                       |  | $    | (0.22   | ) |      | $ | (0.14  | )    |  | $ |     |  
|Diluted-pro forma                                                                                         |  | $    | (0.22   | ) |      | $ | (0.14  | )    |  | $ |     |  



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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which
also requires that the information be determined as if the company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method described in that statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2004, 2003, and 2002:



|                                                               |  |      |     |   |      |   |      |      |  |   |     |  
|-------------------------------------------------------------- |  | ---- | --- | - | ---- | - | ---- | ---- |  | - | --- | -
|                                                               |  | 2004 |     |   | 2003 |   |      | 2002 | 
|Risk-free interest                                             |  |      | 4.7 | % |      |   | 3.5  | %    |  |   | 4.0 | %
|Dividend yields                                                |  |      | 9.7 | % |      |   | 10.6 | %    |  |   | 7.4 | %
|Volatility factors                                             |  |      | 177 |   |      |   | 160  |      |  |   | 162 |  
|Weighted-average expected life (years)                         |  |      | 10  |   |      |   | 10   |      |  |   | 10  |  
|Weighted-average fair value of options granted during the year |  | $    | .18 |   |      | $ | .06  |      |  | $ | .41 |  



The Black-Scholes
option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect
the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.



Advertising Costs



Costs incurred for the production and distribution of advertising are expensed as incurred. Amounts expensed during 2004 and 2003 were $2.2 million and
$2.0 million during 2002. These amounts are included in property and maintenance expenses in the consolidated statements of operations.



Earnings Per Common Share



Basic and diluted earnings per common share are calculated in accordance with FASB Statement No. 128 Earnings Per Share. Basic earnings per
common share is computed based upon the weighted average number of shares outstanding during the year. Diluted earnings per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the
year. The operating partnership units and the Series A Convertible Preferred Shares are not included in dilutive earnings per share calculations since the impact is not dilutive.



Minority Interest in Operating Partnership



Interest in the Cornerstone NC Operating Limited Partnership held by a limited partner is represented by operating partnership units (OP
Units), as discussed in Note 6 below. The operating partnerships income is allocated to holders of OP Units based upon net income available to common shareholders and the weighted average number of OP Units outstanding to weighted
average common shares outstanding plus OP Units outstanding during the period. OP Units can be exchanged for cash or common shares on a one-for-one basis, at the companys option. Capital contributions, distributions, and profits and losses are
allocated to minority interests in accordance with the terms of the partnership agreement. OP Units as a percentage of total OP Units and shares outstanding were 3.1% and 3.2% at December 31, 2004 and 2003, respectively.



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



Income Taxes



The company is operated as, and annually elects to be taxed as, a real estate investment trust under the Internal Revenue Code of 1986, as amended (the
Code). Generally, a real estate investment trust that complies with the provisions of the Code and distributes at least 90% of its taxable income to its shareholders does not pay federal income taxes on its distributed income.
Accordingly, no provision has been made for federal income taxes. The company is subject to various state, local, excise and franchise taxes.



The company created a C-corporation which elected the taxable REIT subsidiary (TRS) status for financing purposes for one apartment community.
The TRS is subject to federal, state and local income taxes. For the years ended December 31, 2004 and 2003, the impact of this TRSs income taxes and related tax attributes was not material to the accompanying consolidated financial
statements.



The differences between net income available to
common shareholders for financial reporting purposes and taxable income before dividend deductions, as well as differences between the tax basis and financial reporting basis of the companys assets, relate primarily to temporary differences,
principally real estate depreciation, tax deferral of certain gain on property sales and tax free mergers and acquisitions. The temporary differences in depreciation result from differences in the book and tax basis of certain real estate assets and
the differences in the methods of depreciation and lives of the real estate assets. The aggregate cost for federal income tax purposes was approximately $1.3 billion at December 31, 2004.



For federal income tax purposes, distributions paid to common shareholders consist of ordinary income, capital gains, return
of capital or a combination thereof. For the three years ended December 31, 2004, distributions paid per common share were classified as follows (unaudited):



|                               |  |      |     |      |   |      |  |   |     
|------------------------------ |  | ---- | --- | ---- | - | ---- |  | - | ----
|                               |  | 2004 |     | 2003 |   | 2002
|Ordinary income                |  | $    | .11 |      | $ | .05  |  | $ | .33 
|Qualified dividend income      |  |      | .01 |      |   |     |  |   |    
|Long-term capital gain         |  |      | .01 |      |   |     |  |   |    
|Unrecaptured Section 1250 gain |  |      | .06 |      |   | .02  |  |   |    
|Return of capital              |  |      | .61 |      |   | .81  |  |   | .79 
|                               |  |      |     |      |   |      |  |   |     
|                               |  | $    | .80 |      | $ | .88  |  | $ | 1.12
|                               |  |      |     |      |   |      |  |   |     



In 2004, approximately
57.3% of distributions on preferred shares represented ordinary income, 2.0% represented qualified dividend income, 33.3% represented unrecaptured Section 1250 gain and 7.4% represented long-term capital gain. In 2003 and 2002, of the total
preferred distribution, 100% was taxable as ordinary income.



Use of
Estimates



The preparation of financial statements in
accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ
from those estimates.



Derivative and Hedging Activities



The company uses derivative financial instruments in the normal course of
business to reduce its exposure to fluctuations in interest rates. As of December 31, 2004, we had seven interest rate cap agreements with a notional value aggregating $75.0 million that are used to fix the interest rate on a portion of our variable
rate debt. Changes in the fair value of the hedging instrument are reflected in accumulated other comprehensive income. The ineffective portion of the change in fair value of the hedge is immediately reflected in earnings,



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



which was not material for 2004. While the company intends to continue to meet the conditions for hedge accounting, once a particular interest rate cap does
not qualify as highly effective, any change in the fair value of the derivative used as a hedge would be reflected in current earnings. If the transaction to which the instrument is hedging is not probable of occurring, the accumulated loss or gain
in the value of the derivative instrument since its inception may be required to be immediately reclassified from the stockholders equity section of the balance sheet to the income statement.



Comprehensive Income/Loss



On January 1, 1998, the company adopted SFAS No. 130, Reporting
Comprehensive Income. The company does not currently have any items of comprehensive income requiring separate reporting and disclosure prior to 2004. Comprehensive loss for the year ended December 31, 2004 was $0.4 million. This difference
between net income available to common shareholders and comprehensive loss is the decrease in the fair value of interest rate cap agreements.



Expenses for Colonial Properties Trust Transaction



In connection with the proposed merger transaction with Colonial Properties Trust, as discussed in Note 14, costs associated with this proposed
transaction are expensed as incurred. Expenses, which are contingent upon the closing of the transaction, will not be expensed until such time the transaction is probable.



Reclassification



Certain previously reported amounts have been reclassified to conform to the current year presentation.



Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board issued
Interpretation 46, Consolidation of Variable Interest Entities. (FIN 46) which was revised in December 2003. The company has formed wholly-owned subsidiaries for financing purposes and such financing is reflected in the
consolidated financial statements. Effective January 1, 2004, the company adopted the provisions of FIN 46. The company did not identify any variable interest entities (VIEs) of which the company is the primary beneficiary, thus, the company was not
required to consolidate any VIEs.



On December 16, 2004, the
FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement
123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values, pro forma disclosure is no longer an alternative. Statement 123(R) must be
adopted no later than July 1, 2005 by the company. The adoption of the statement is not anticipated to have a material impact on the companys financial results.



Note 2    Acquisition, Disposition, and Development



Acquisitions



On March 30, 2004, the company acquired an apartment community with 138 apartment homes for a purchase price of $10.9
million. The company assumed a $10.0 million note, issued $0.2 million in the form of



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



non-preferred operating partnership units and made cash payments of $0.7 million to fund the acquisition. The company allocated $1.1 million to land, $9.7
million to buildings, $0.1 million to furniture and fixtures and assumed $10.0 million in secured financing.



On May 28, 2003, the company completed the acquisition of Merry Land Properties, Inc. (Merry Land), which owned nine apartment communities
containing 1,966 apartment homes, interests in two real estate joint ventures, two parcels of undeveloped land that the company plans to develop into additional apartment homes, and a third party property management business. The acquisition was
structured as a merger of Merry Land into a wholly owned qualified REIT subsidiary of the company. The merger qualified as a tax-free reorganization and was accounted for under the purchase method of accounting. The company used various valuation
methods to allocate the purchase price between land, buildings and improvements, equipment, identified intangible assets of in-place leases and debt assumed. The purchase price was $159.4 million, which includes the issuance of equity, assumption of
debt and the fair value adjustment to debt, and direct costs of the acquisition. Under the terms of the merger agreement, each Merry Land shareholder received 1.818 of the companys common shares and 0.220 of the companys Series B
Convertible Preferred Shares. A total of 5.0 million common shares and 0.6 million of the companys Series B Convertible Preferred Shares were issued as a result of the merger. The Series B Convertible Preferred Shares met the conversion
conditions and were converted to common shares on October 1, 2003. In addition, the company assumed approximately $90.6 million of Merry Lands debt with a fair value of $110.5 million at the date of assumption. No goodwill was recorded as a
result of this transaction. The company allocated a portion of the Merry Land purchase price to an intangible asset based on a valuation of in-place leases at the time of the merger in the amount of $1.1 million. The company recorded $0.2 million
and $0.9 million of amortization of the net intangibles in 2004 and 2003, respectively.



Development



As of December 31, 2004, the
company had two development projects, which were assumed with the Merry Land merger. The company capitalized interest, real estate taxes, insurance and other costs of approximately $0.8 million and $0.1 during 2004 and 2003, respectively, to its
development and major renovation projects. Land associated with construction in progress was $13.5 million and $5.4 million as of December 31, 2004 and 2003, respectively.



Dispositions



On July 22, 2004, the company sold two of its apartment communities in Columbia, SC to Sterling American Property LP for $16.4 million and retained a 10%
limited partnership interest in the entity. The company will continue to manage these apartment communities under a standard fee management contract. In accordance with generally accepted accounting principles, since the sale was to an unrelated
buyer, collection of the sales price has occurred and the company will not be required to support the operations of the property or its related obligations to an extent greater than its proportionate interest, the company has recognized the part of
the profit (90%) proportionate to the outside interests in the buyer at the date of sale. The resulting gain for financial reporting purposes was approximately $3.4 million. The company has not classified this sale as discontinued operations in the
statement of operations since the company continues to hold a 10% interest in the entity that owns underlying apartment communities.



Discontinued Operations



During the first quarter of 2003, the company closed on the sale of two apartment communities containing a total of 395 apartment homes for a total of
$15.9 million and recognized a gain of $1.9 million. As a result of the



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



sales, the companys financial statements have been prepared with these two apartment communities results of operations and the gain from sale
isolated and shown as discontinued operations. All historical statements presented have been restated to conform to this presentation in accordance with SFAS No. 144.



The components of income from operations related to discontinued operations for the years ended December 31, 2003 and 2002
are shown below. These include the results of operations through the date of sale for the year ended December 31, 2003 and a full period of operations for the year ended December 31, 2002 (dollars in thousands):



|                                    |  |      |       |   |      |   |      
|----------------------------------- |  | ---- | ----- | - | ---- | - | -----
|                                    |  | 2003 |       |   | 2002
|Rental and other property income    |  | $    | 363   |   |      | $ | 2,853
|                                    |  |     
|Expenses:                           |  |      |       |   |      |   |      
|Property and maintenance            |  |      | 158   |   |      |   | 851  
|Taxes and insurance                 |  |      | 58    |   |      |   | 398  
|Depreciation of real estate assets  |  |      | 162   |   |      |   | 865  
|                                    |  |      |       |   |      |   |      
|Total expenses                      |  |      | 378   |   |      |   | 2,114
|                                    |  |      |       |   |      |   |      
|Net income (loss)                   |  |      | (15   | ) |      |   | 739  
|                                    |  |     
|Gain on sales of investments        |  |      | 1,887 |   |      |   |     
|                                    |  |      |       |   |      |   |      
|Income from discontinued operations |  | $    | 1,872 |   |      | $ | 739  
|                                    |  |      |       |   |      |   |      



The company had no
assets that qualified as held for disposition as defined by SFAS No. 144 at December 31, 2004.



Note 3    Investment in Rental Property



At December 31, 2004, the companys three largest markets comprised 52% of its real estate owned, at cost. The following is a summary of rental
property owned at December 31, 2004 (in thousands):



|                              |  |                         |           |                |   |                          |  |                |         |  |   |        
|----------------------------- |  | ----------------------- | --------- | -------------- | - | ------------------------ |  | -------------- | ------- |  | - | -------
|Market                        |  | Initial AcquisitionCost |           | Carrying Cost* |   | Accumulated Depreciation |  | Encumbrances**
|                              |  |                         |          
|Dallas/Fort Worth, TX         |  | $                       | 288,071   |                | $ | 321,585                  |  | $              | 69,017  |  | $ | 192,220
|Charlotte, NC                 |  |                         | 163,459   |                |   | 191,475                  |  |                | 42,632  |  |   | 60,041 
|Raleigh/Durham, NC            |  |                         | 133,965   |                |   | 151,717                  |  |                | 35,099  |  |   | 79,296 
|Atlanta, GA                   |  |                         | 96,280    |                |   | 120,963                  |  |                | 26,538  |  |   | 40,161 
|Richmond, VA                  |  |                         | 89,223    |                |   | 103,822                  |  |                | 22,272  |  |   | 71,038 
|Charleston, SC                |  |                         | 88,299    |                |   | 98,111                   |  |                | 13,000  |  |   | 46,858 
|Savannah, GA                  |  |                         | 79,402    |                |   | 81,593                   |  |                | 4,919   |  |   | 66,748 
|Virginia Beach, VA            |  |                         | 28,084    |                |   | 40,615                   |  |                | 16,255  |  |   | 34,476 
|Other (9 markets)             |  |                         | 174,908   |                |   | 199,999                  |  |                | 42,495  |  |   | 137,475
|                              |  |                         |           |                |   |                          |  |                |         |  |   |        
|                              |  |                         | 1,141,691 |                |   | 1,309,880                |  |                | 272,227 |  |   | 822,081
|Real estate under development |  |                         | 13,454    |                |   | 13,454                   |  |                |        |  |   |       
|                              |  |                         |           |                |   |                          |  |                |         |  |   |        
|                              |  | $                       | 1,155,145 |                | $ | 1,323,334                |  | $              | 272,227 |  | $ | 822,081
|                              |  |                         |           |                |   |                          |  |                |         |  |   |        

---

|* |  | Includes real estate commissions, closing costs, and improvements capitalized since the date of acquisition.
|- |  | ------------------------------------------------------------------------------------------------------------

|** |  | The total includes $93.8 million of debt secured by 17 apartment communities which is not allocated among the individual apartment communities.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



The following is a reconciliation of the carrying amount of real estate owned (in thousands):



|                                           |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                           |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Balance at January 1,                      |  | $    | 1,307,420 |   |      | $ | 1,158,827 |      |  | $ | 1,070,867 |  
|Real estate purchased                      |  |      | 11,352    |   |      |   | 140,875   |      |  |   | 71,119    |  
|Sale/disposal of assets held for sale, net |  |      | (19,198   | ) |      |   | (12,993   | )    |  |   | (1,662    | )
|Capital lease additions                    |  |      | 49        |   |      |   | 118       |      |  |   | 1,148     |  
|Development of real estate assets          |  |      | 8,004     |   |      |   | 4,170     |      |  |   | 1,272     |  
|Capital improvements                       |  |      | 15,707    |   |      |   | 16,423    |      |  |   | 16,083    |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |  
|Balance at December 31,                    |  | $    | 1,323,334 |   |      | $ | 1,307,420 |      |  | $ | 1,158,827 |  
|                                           |  |      |           |   |      |   |           |      |  |   |           |  



The following is a
reconciliation of accumulated depreciation (in thousands):



|                        |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                        |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Balance at January 1,   |  | $    | 224,535 |   |      | $ | 172,978 |      |  | $ | 128,653 |  
|Depreciation expense    |  |      | 54,606  |   |      |   | 51,901  |      |  |   | 45,157  |  
|Sale/disposal of assets |  |      | (6,914  | ) |      |   | (344    | )    |  |   | (832    | )
|                        |  |      |         |   |      |   |         |      |  |   |         |  
|Balance at December 31, |  | $    | 272,227 |   |      | $ | 224,535 |      |  | $ | 172,978 |  
|                        |  |      |         |   |      |   |         |      |  |   |         |  



Note
4    Investment in Unconsolidated Real Estate Joint Ventures



On July 22, 2004, the company entered into a joint venture with Sterling American Property Inc., discussed above. The company has a 10% interest in the joint venture and the company will continue to manage the two
apartment communities. On April 15, 2004, the company issued 250,000 common shares to The Reserve at Mayfaire, LLC as consideration for a 25% interest in a joint venture which is developing a 264 apartment home community in Wilmington, North
Carolina for a total cost of approximately $24 million.



In
connection with the Merry Land merger in 2003, the company acquired interest in two joint ventures. The company assumed a 35% interest in Merritt at Godley Station, LLC, an apartment community under development and a 10% interest in the SC Cypress
Cove Venture, LLC, which owns an apartment community.



The
company does not control these assets and has accounted for its investments under the equity method of accounting. The investments in the joint ventures are recorded at cost and subsequently adjusted for equity in net income (loss) and cash
contributions and distributions.



The companys investment
in joint ventures was $4.4 million and $2.6 million at December 31, 2004 and 2003, respectively.



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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



Note 5    Notes Payable



Secured



Secured borrowings outstanding at December 31, 2004 and 2003 were as follows (dollars in thousands):



|                    |  |                       |         |                                           |   |         |               |      |   |  |                                      
|------------------- |  | --------------------- | ------- | ----------------------------------------- | - | ------- | ------------- | ---- | - |  | -------------------------------------
|                    |  | Outstanding Principal |         | Effective Interest Rate December 31, 2004 |   |         | Maturity Date
|                    |  | 2004                  |         | 2003                                      |   |        
|Fixed rate debt (a) |  | $                     | 5,443   |                                           | $ | 5,728   |               | 3.09 | % |  | September 2007                       
|                    |  |                       | 35,291  |                                           |   | 36,817  |               | 3.72 | % |  | July, August 2009                    
|                    |  |                       | 49,889  |                                           |   | 51,881  |               | 3.94 | % |  | September 2011, November 2041        
|                    |  |                       | 16,390  |                                           |   | 16,565  |               | 6.98 | % |  | January 2012                         
|                    |  |                       | 9,115   |                                           |   | 9,226   |               | 6.42 | % |  | November 2011                        
|                    |  |                       | 44,797  |                                           |   | 70,151  |               | 6.75 | % |  | May 2011                             
|                    |  |                       | 8,243   |                                           |   | 8,333   |               | 7.10 | % |  | July 2011                            
|                    |  |                       | 78,278  |                                           |   | 79,110  |               | 7.16 | % |  | July, August 2011                    
|                    |  |                       | 15,101  |                                           |   | 15,276  |               | 6.83 | % |  | May 2011                             
|                    |  |                       | 73,382  |                                           |   | 74,218  |               | 6.99 | % |  | April 2011                           
|                    |  |                       | 141,000 |                                           |   | 141,000 |               | 7.35 | % |  | January 2011                         
|                    |  |                       | 73,500  |                                           |   | 73,500  |               | 7.29 | % |  | October 2006                         
|                    |  |                       | 3,462   |                                           |   | 21,551  |               | 6.48 | % |  | July 2006                            
|                    |  |                       | 12,253  |                                           |   | 12,390  |               | 6.68 | % |  | April 2012                           
|                    |  |                       | 2,772   |                                           |   |        |               | 4.50 | % |  | April 2014                           
|                    |  |                       | 19,586  |                                           |   |        |               | 5.05 | % |  | October 2013                         
|                    |  |                       |         |                                           |   |         |               |      |   |  |                                      
|                    |  |                       | 588,502 |                                           |   | 615,746 |               |      |   |  |                                      
|                    |  |                       |         |                                          
|Variable rate debt  |  |                       | 24,564  |                                           |   | 14,753  |               | 3.49 | % |  | April 2005, October 2007             
|                    |  |                       | 15,617  |                                           |   | 15,781  |               | 3.34 | % |  | September 2006                       
|                    |  |                       | 14,875  |                                           |   | 15,000  |               | 3.89 | % |  | November 2006                        
|                    |  |                       | 25,266  |                                           |   | 25,000  |               | 4.30 | % |  | September 2014                       
|                    |  |                       | 20,268  |                                           |   | 13,604  |               | 3.97 | % |  | May 2005                             
|                    |  |                       | 50,000  |                                           |   | 50,000  |               | 3.35 | % |  | July 2005                            
|                    |  |                       | 74,880  |                                           |   | 51,870  |               | 2.91 | % |  | August and September 2008, March 2009
|                    |  |                       | 8,109   |                                           |   |        |               | 3.92 | % |  | December 2006                        
|                    |  |                       |         |                                           |   |         |               |      |   |  |                                      
|                    |  |                       | 233,579 |                                           |   | 186,008 |               |      |   |  |                                      
|                    |  |                       |         |                                          
|Total               |  | $                     | 822,081 |                                           | $ | 801,754 |               |      |   |  |                                      
|                    |  |                       |         |                                           |   |         |               |      |   |  |                                      

---

|(a) |  | Includes fair value premium adjustments aggregating $15.1 million in 2004 and $18.4 million in 2003 that were recorded in connection with assumption of above market rate debt in
connection with the acquisition of apartment communities. These premiums are amortized into interest expense (which reduces interest expense) over the remaining term of the related indebtedness on the effective interest method.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Fixed Rate Debt



The companys fixed rate debt as of December 31, 2004 represented 71.6%
of the companys debt. At December 31, 2004 and December 31, 2003, the outstanding fixed rate debt was $588.5 million and $615.7 million, respectively, including the fair value premium adjustments aggregating $15.1 million and $18.4 million,
respectively. The fair value premium adjustment was recorded in connection with assumption of above market rate debt in connection with the acquisition of apartment communities. These premiums are amortized into



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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



interest expense (which reduces interest expense) over the remaining term of the related indebtedness on the effective interest method. Scheduled maturities
are at various dates through November 2041. For the year ended December 31, 2004 and 2003, the weighted-average interest rate was 6.5% and 6.8%, respectively.



During 2004, the company entered into two secured fixed rate financings, totaling $22.4 million. The notes are secured by two apartment communities and
the maturity dates vary through April 2013. The notes require monthly installments, including principal and interest. The financing proceeds were used to pay off the existing fixed debt on these apartment communities.



During the first quarter of 2004, the company repaid $15.1 million in fixed
rate debt with variable rate debt, as discussed below.



Variable Rate Debt



The companys
variable rate debt at December 31, 2004 represented 28.4% of the companys debt. At December 31, 2004 and December 31, 2003, the outstanding variable rate debt was $233.6 million and $186.0 million, respectively. For the year ended December 31,
2004 and 2003, the weighted-average interest rate was 2.8% and 3.0%, respectively.



During 2004, the company entered into four secured variable rate financings and assumed one variable rate note, totaling $66.5 million. The notes are secured by six apartment communities and the maturity dates vary
through September 2014. Three notes require monthly installments, including principal and interest and the note assumed requires payments of interest only. The note on an apartment community under development is interest only which is funded through
advances on this construction loan.The financing proceeds were used to pay off the $15.1 million of the existing fixed rate debt on three of these apartment communities, $7.2 million on the revolving credit facility and the existing variable
rate debt on one apartment community.



In 2003, in connection
with the Merry Land merger, the company assumed nine fixed or variable rate mortgage notes with an aggregate principal amount of $90.6 million. These mortgages were recorded at a fair value of $110.5 million at the date of assumption. The difference
between the fair value and the principal amount is being amortized as an adjustment to interest expense over the term of the respective notes. The mortgage notes bear a weighted interest rate of 7.4% per annum and an effective weighted average
interest rate of 3.2%, including the effect of the fair value adjustment. The fixed rate mortgage notes are payable in monthly installments, including principal and interest. The variable rate mortgage note requires payments of interest only.
Prepayment penalties apply for early retirements on the fixed rate mortgage notes. Scheduled maturities are at various dates through September 2011 and one mortgage notes matures November 2041.



During 2003, the company completed a plan of refinancing in which the
companys unsecured lines of credit were replaced with a combination of new secured lines of credit from a commercial bank and three additional secured financing transactions. The company entered into a $50 million secured revolving credit
facility. The two-year secured credit facility is divided into two loans, a $40 million revolving credit facility and a $10 million swingline credit facility. The company financed $101.8 million in variable rate mortgage notes. Proceeds
from these financings repaid the outstanding balance of the companys $85 million unsecured line of credit and repaid $23.3 million in variable and fixed rate mortgage notes. The remainder of the proceeds from these financings were used for
excess borrowing capacity, working capital needs and other corporate purposes.



In connection with the issuance of its variable rate debt, in order to limit its exposure to increases in interest rates, the company paid approximately $0.7 million to enter into seven interest rate cap agreements
which effectively cap the interest rate on approximately $75 million of the companys variable rate debt. The cap



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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



rates on these agreements range from 6.8% to 8.4% and have a weighted average rate of 7.7%. Maturities on these rate cap agreements range from August 2008 to
February 2009. The fair value of these interest rate cap agreements was approximately $0.1 million at December 31, 2004 and is included in other assets.



The aggregate maturities of principal, including monthly installments of principal previously described, for secured debt for the five years subsequent to
December 31, 2004 are as follows (in thousands):



|                                      |  |        |        
|------------------------------------- |  | ------ | -------
|Year                                  |  | Amount
|2005                                  |  | $      | 89,871 
|2006                                  |  |        | 120,215
|2007                                  |  |        | 19,747 
|2008                                  |  |        | 57,370 
|2009                                  |  |        | 34,209 
|Thereafter                            |  |        | 485,572
|                                      |  |        |        
|                                      |  |        | 806,984
|                                      | 
|Fair Value Adjustment of Assumed Debt |  |        | 15,097 
|                                      |  |        |        
|                                      |  | $      | 822,081
|                                      |  |        |        



Estimated fair value
is based on mortgage rates believed to be available to the company for the issuance of debt with similar terms and remaining lives. The fair value of the companys fixed and variable rate secured debt at December 31, 2004 and 2003 was $868
million and $886 million, respectively.



Capitalized Interest



During 2004 and 2003, the company capitalized interest of
$0.6 million and $0.1 million, respectively. Advances on the development projects construction loan of $0.1 million was included in the 2004 capitalized interest. Overall, weighted-average interest rate incurred for all borrowings was 5.5% in
2004 and 5.9% in 2003.



Note 6    Operating Partnership
and Shareholders Equity



Operating Partnership



Effective October 1, 2001, State Street, LLC and State Street I, LLC, each a
North Carolina limited liability company (collectively, the Limited Partners), and the company, as the sole general partner, formed Cornerstone NC Operating Limited Partnership, a Virginia limited partnership (the Limited
Partnership). The company has approximately an 85% interest in the Limited Partnership. The Limited Partners are minority limited partners and are not otherwise related to the company. The Limited Partners contributed and agreed to contribute
property to the Limited Partnership in exchange for preferred and non-preferred operating partnership units. Beginning October 1, 2002, the Limited Partners became able to elect to redeem a portion of the preferred operating partnership units. If
the Limited Partners make the election, the company, at its option, will convert the preferred operating partnership units into either common shares of the company on a one-for-one basis or cash in an amount per unit equal to the closing price of a
common share of the company on the exercise date (or other specified price if there is no closing price on that date), subject to anti-dilution adjustments.



On March 30, 2004, the Limited Partnership acquired an apartment community with 138 apartment homes for a purchase price of $10.9 million. The total
consideration for the transaction includes the assumption of $10.0 million in secured financing, the issuance of 20,000 non-preferred operating partnership units, totaling $0.2 million, and cash payments totaling $0.7 million. The non-preferred
operating partnership units converted into preferred operating partnership units on January 1, 2005.



54



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



During the first quarter of 2003, a total of 0.9 million preferred operating partnership units were
converted into common shares on a one-to-one basis. During 2003, 0.3 million non-preferred operating partnership units converted to preferred operating partnership units as certain lease-up and stabilization criteria were met. As of December 31,
2004, there were 1.8 million preferred operating partnership units eligible for conversion into common shares on one-for-one basis or cash, at the companys option.



Preferred Stock



On December 21, 2004, the company redeemed all 127,380 outstanding Series A Convertible Preferred Shares. The company paid a redemption price of $25 per
share and dividends for a total of $3.3 million in cash. The difference between the total consideration given and the carrying value of the preferred shares (including issuance costs) totaled approximately $0.5 million and is included in the
consolidated statements of operations as a reduction to arrive at net loss available to common shareholders.Pursuant to the Merger Agreement with Colonial, the company was required to redeem the Series A Convertible Preferred Shares.The company declared and paid total distributions of $2.3042 and $2.3752 per share on the preferred shares during 2004 and 2003, respectively.



Common Stock



In 1997, the company adopted a Dividend Reinvestment and Share Purchase Plan (as amended from time to time, Plan) which allows any
recordholder to reinvest distributions without payment of any brokerage commissions or other fees. Of the total proceeds raised from common shares during the years ended December 31, 2004, 2003, and 2002, $4.9 million, $5.4 million, and $6.8
million, respectively, were provided through the reinvestment of distributions.



During 2000, the company completed its $50 million common share repurchase program which was authorized by the Board of Directors in September 1999. The Board authorized the repurchase of up to an additional $50
million of the companys common shares in September 2000. Pursuant to the additional authorization, the company has, as of December 31, 2004, repurchased 2.0 million common shares at an average price of $10.80 per share for a total cost of
$21.3 million; however, the company did not repurchase any common shares in 2004.



Note 7    Severance Costs and Organizational Charges



On March 31, 2004, the Companys Co-Chief Operating Officer ceased to serve as an officer and employee of the company and her employment agreement with the company was terminated. In addition, the company
terminated the lease for its Fort Worth, Texas office. These charges are included in the consolidated statements of operations under the category Severance costs and other organizational charges. The majority of the $0.8 million charge
will be paid out over a period of 30 months. As of December 31, 2004, the remaining severance costs and other organizational charges liability was $0.4 million.



Note 8    Benefits Plans



Stock Incentive Plan



Based on the outstanding shares, under the 1992 Incentive Plan, as amended, a maximum of 2.0 million options could be granted, at the discretion of the
Board of Directors, to certain officers and key employees of the company. Under the Directors Plan, as amended, a maximum of 0.9 million options could be granted to the directors of the company. In 2004, the company granted 89,696 options to
purchase shares under the Directors Plan.



55



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



Both of the plans provide, among other things, that options be granted at exercise prices not lower
than the market value of the shares on the date of grant. Under the Incentive Plan, generally options become exercisable after six months after the date of grant. Generally the optionee has up to 10 years from the date of grant to exercise the
options. The exercise prices of these options range from $7.41 to $12.125 per option. Activity in the companys share option plans during the three years ended December 31, 2004 is summarized in the following table (in thousands, except per
share data):



|                                                               |  |         |   |  |                                       |       |         |       |                                       |   |         |  |       |                                       |  |   |      
|-------------------------------------------------------------- |  | ------- | - |  | ------------------------------------- | ----- | ------- | ----- | ------------------------------------- | - | ------- |  | ----- | ------------------------------------- |  | - | -----
|                                                               |  | Options |   |  | 2004 Weighted- Average Exercise Price |       | Options |       | 2003 Weighted- Average Exercise Price |   | Options |  |       | 2002 Weighted- Average Exercise Price
|Outstanding, beginning of year                                 |  | 1,818   |   |  | $                                     | 10.23 |         | 1,749 |                                       | $ | 10.33   |  | 1,725 |                                       |  | $ | 10.32
|Granted                                                        |  | 90      |   |  |                                       | 8.23  |         | 69    |                                       |   | 7.61    |  | 58    |                                       |  |   | 10.80
|Exercised                                                      |  |        |   |  |                                       |      |         |      |                                       |   |        |  | (18   | )                                     |  |   | 10.05
|Forfeited                                                      |  | (191    | ) |  |                                       | 11.58 |         |      |                                       |   |        |  | (16   | )                                     |  |   | 11.65
|                                                               |  |         |   |  |                                       |       |         |       |                                       |   |         |  |       |                                       |  |   |      
|Outstanding, end of year                                       |  | 1,717   |   |  | $                                     | 9.97  |         | 1,818 |                                       | $ | 10.23   |  | 1,749 |                                       |  | $ | 10.33
|                                                               |  |         |   |  |                                       |       |         |       |                                       |   |         |  |       |                                       |  |   |      
|Exercisable at end of year                                     |  | 1,717   |   |  | $                                     | 9.97  |         | 1,818 |                                       | $ | 10.23   |  | 1,749 |                                       |  | $ | 10.33
|                                                               |  |         |   |  |                                       |       |         |       |                                       |   |         |  |       |                                       |  |   |      
|Weighted-average fair value of options granted during the year |  |         |   |  | $                                     | 0.18  |         |       |                                       | $ | 0.06    |  |       |                                       |  | $ | 0.41 
|                                                               |  |         |   |  |                                       |       |         |       |                                       |   |         |  |       |                                       |  |   |      



In 1999, Mr. Glade M.
Knight was granted options (Award Options) to purchase 348,771 of the companys Common Shares at an exercise price of $10.125. If certain events occur, the exercise price will be $1.00 per common share for 180 days following the
occurrence of those events. If such an event occurs, and Mr. Glade M. Knight either elects not to, or otherwise fails to, exercise any exercisable Award Options, then the company must pay to Mr. Glade M. Knight the difference between the
exercise price and the value of the common shares that would be obtained upon exercise.



401(K) Savings Plan



Eligible employees of the
company participate in a contributory employee savings plan. Under the plan, the company may match a percentage of contributions made by eligible employees, such percentage to apply to a maximum of 3% of their annual salary. Contribution expenses
under this plan for 2004, 2003 and 2002 were $207,636, $116,889, and $82,427, respectively.



Note 9    Related-Party Transactions



During 2004, Mr. Glade M. Knight, the companys Chairman and Chief Executive Officer, served as Chairman and Chief Executive Officer of three
hospitality REITs, Apple Hospitality Two, Inc., Apple Hospitality Five, Inc. and Apple REIT Six, Inc., and also owned companies that provided services to these entities. During 2004 and 2003, the company provided real estate acquisition and
offering-related and other services to these entities and received payment of approximately $0.2 million for each year.



Other Relationships



Leslie A. Grandis, a director of the company, is also a partner in McGuireWoods LLP, which provides outside legal services to the company. During 2004 and
2003, the company paid $1.7 million and $1.6 million, respectively for services provided by McGuire Woods LLP.



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



Note 10    Earnings (Loss) Per Share



The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):



|                                                                                                                  |  |      |         |   |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                  |  | 2004 |         |   | 2003 |   |        | 2002 | 
|Numerator:                                                                                                        |  |      |         |   |      |   |        |      |  |   |        |  
|Net loss available to common shareholders                                                                         |  | $    | (12,505 | ) |      | $ | (7,601 | )    |  | $ | (83    | )
|Numerator for basic and diluted earnings per shareloss available to common stockholders after assumed conversion |  | $    | (12,505 | ) |      | $ | (7,601 | )    |  | $ | (83    | )
|Denominator:                                                                                                      |  |      |         |   |      |   |        |      |  |   |        |  
|Denominator for basic earnings per share-weighted-average shares                                                  |  |      | 56,025  |   |      |   | 52,643 |      |  |   | 48,068 |  
|Effect of dilutive securities:                                                                                    |  |      |         |   |      |   |        |      |  |   |        |  
|Stock options                                                                                                     |  |      |        |   |      |   |       |      |  |   |       |  
|                                                                                                                  |  |      |         |   |      |   |        |      |  |   |        |  
|Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions               |  |      | 56,025  |   |      |   | 52,643 |      |  |   | 48,068 |  
|Basic and diluted earnings (loss) per common share                                                                |  | $    | (0.22   | ) |      | $ | (0.14  | )    |  | $ | 0.00   |  
|                                                                                                                  |  |      |         |   |      |   |        |      |  |   |        |  



Note
11    Commitments



The company has
capital leases on certain equipment. The leases generally provide for the lessee to pay taxes, maintenance, insurance and certain other operating costs of the leased property which are expensed as incurred. The following is a summary of the future
minimum payments subsequent to December 31, 2004 (in thousands):



|           |  |        |    
|---------- |  | ------ | ---
|Year       |  | Amount
|2005       |  | $      | 300
|2006       |  |        | 286
|2007       |  |        | 211
|2008       |  |        | 71 
|2009       |  |        | 39 
|Thereafter |  |        | 22 
|           |  |        |    
|           |  | $      | 929
|           |  |        |    



The company has two
development projects, which were assumed with the Merry Land merger mentioned above. One is to be completed during the first quarter of 2005 and the other is to be completed during 2006. The companys share of estimated future cash expenditures
to complete these projects will be funded through advances on future construction loans.



57



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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



Note 12    Quarterly Financial Data (Unaudited)



The following is a summary of quarterly results of operations for the years
ended December 31, 2004 and 2003 (in thousands):



|                                                                                                                        |  |              |        |   |               |   |        |              |  |   |               |   |  |   |        |     
|----------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ------------- | - | ------ | ------------ |  | - | ------------- | - |  | - | ------ | ----
|                                                                                                                        |  | FirstQuarter |        |   | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter |  
|2004                                                                                                                    |  |              |        |   |               |   |        |              |  |   |               |   |  |   |        |     
|Revenues                                                                                                                |  | $            | 44,432 |   |               | $ | 45,755 |              |  | $ | 45,054        |   |  | $ | 47,251 |     
|Income before interest income (expense) and expenses associated with the proposed Colonial Properties Trust transaction |  |              | 8,687  |   |               |   | 9,839  |              |  |   | 8,283         |   |  |   | 7,908  |     
|Net (loss) income                                                                                                       |  |              | (2,738 | ) |               |   | (1,672 | )            |  |   | 290           |   |  |   | (7,586 | )(a)
|Distributions to preferred shareholders                                                                                 |  |              | 76     |   |               |   | 75     |              |  |   | 76            |   |  |   | 67     |     
|Excess consideration paid over book value to preferred shareholders                                                     |  |              |       |   |               |   |       |              |  |   |              |   |  |   | 505    |     
|Net (loss) income available to common shareholders                                                                      |  |              | (2,814 | ) |               |   | (1,747 | )            |  |   | 214           |   |  |   | (8,158 | )   
|Basic and diluted earnings (loss) per common share-continuing operations                                                |  |              | (0.05  | ) |               |   | (0.03  | )            |  |   |              |   |  |   | (0.14  | )   
|Basic and diluted earnings (loss) per common share                                                                      |  |              | (0.05  | ) |               |   | (0.03  | )            |  |   |              |   |  |   | (0.14  | )   
|Distributions per common share                                                                                          |  |              | 0.20   |   |               |   | 0.20   |              |  |   | 0.20          |   |  |   | 0.20   |     
|                                                                                                                        |  |              |        |  
|2003                                                                                                                    |  |              |        |   |               |   |        |              |  |   |               |   |  |   |        |     
|Revenues                                                                                                                |  | $            | 39,998 |   |               | $ | 42,018 |              |  | $ | 44,972        |   |  | $ | 44,664 |     
|Income before interest income (expense)                                                                                 |  |              | 9,201  |   |               |   | 9,084  |              |  |   | 9,457         |   |  |   | 8,448  |     
|Income from discontinued operations                                                                                     |  |              | 1,982  |   |               |   | (27    | )            |  |   | (3            | ) |  |   | (80    | )   
|Net income (loss)                                                                                                       |  |              | 286    |   |               |   | (2,230 | )            |  |   | (2,286        | ) |  |   | (3,068 | )   
|Distributions to preferred shareholders                                                                                 |  |              | 76     |   |               |   | 75     |              |  |   | 76            |   |  |   | 76     |     
|Net income (loss) available to common shareholders                                                                      |  |              | 210    |   |               |   | (2,305 | )            |  |   | (2,362        | ) |  |   | (3,144 | )   
|Basic and diluted earnings (loss) per common share-continuing operations                                                |  |              | (0.04  | ) |               |   | (0.04  | )            |  |   | (0.04         | ) |  |   | (0.06  | )   
|Basic and diluted earnings per common share-discontinued operations                                                     |  |              | 0.04   |   |               |   |       |              |  |   |              |   |  |   |       |     
|Basic and diluted earnings (loss) per common share                                                                      |  |              |       |   |               |   | (0.04  | )            |  |   | (0.04         | ) |  |   | (0.06  | )   
|Distributions per common share                                                                                          |  |              | 0.28   |   |               |   | 0.20   |              |  |   | 0.20          |   |  |   | 0.20   |     

---

|(a) |  | Includes $4.2 million of expenses associated with the proposed Colonial Properties Trust transaction.
|--- |  | -----------------------------------------------------------------------------------------------------



Note 13    Industry Segments



The company owns and operates multifamily apartment communities throughout the southern regions of the United States that
generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The company separately evaluates the performance of each of its apartment communities. However, because each of the apartment
communities has similar economic characteristics, facilities, services, and tenants, the apartment communities have been aggregated into a single apartment communities segment. All segment disclosure is included in or can be derived from the
companys consolidated financial statements. The companys property management business is not material to its operations.



Note 14    Recent Events



Acquisition by Colonial Properties Trust



On October 25, 2004, the company entered into an Agreement and Plan of Merger (the Merger Agreement) with Colonial Properties Trust
(Colonial) and CLNL Acquisition Sub LLC under which the



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CORNERSTONE REALTY INCOME TRUST, INC.



NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS(Continued)



company will merge with and into CLNL Acquisition Sub LLC. Pursuant to a registration statement filed with the Securities and Exchange Commission that became
effective on February 11, 2005, the company mailed a joint proxy statement/prospectus to its shareholders, seeking approval of the merger and of the related plan of merger. The company has called a special meeting of its shareholders for April 1,
2005, at which the shareholder vote on the merger is scheduled to take place.



Under the terms of the Merger Agreement, company shareholders have the right to elect to receive Colonial common shares or preferred depositary shares, subject to the restriction that the preferred depositary shares
issued will not exceed approximately 25 percent of the total merger consideration. Company shareholders who receive common shares are expected to receive 0.2581 Colonial common shares for each company share. The company shareholders who receive
preferred depositary shares are expected to receive 0.4194 shares of $25 liquidation preference redeemable Series E Preferred Depositary Shares with a dividend rate of 7.62 percent (subject to increase based on future increases in the level of
Colonial common share dividends above $0.79 per share) for each company share. The conversion rates are subject to adjustments provided for in the merger agreement, although the company does not expect any further material adjustments in the
conversion rates.



There are a number of conditions that must
occur for the merger to close. These conditions include the required approval by the shareholders of both the company and Colonial and the receipt of necessary consents.



The company has the right to terminate the transactions under the Merger Agreement if Colonials average closing common
share price for the 20 trading days preceding 10 trading days prior to the close of the transaction is below $31.00, subject to Colonials right to pay additional consideration, in the form of Colonial common shares, cash or a combination,
equal to $31.00 minus Colonials average closing common share price. Colonial has the right to terminate the transaction if Colonials average closing common share price for the same period is above $49.00.



Tax Matters



A REIT generally is not taxed at the corporate level on income that it
currently distributes to its shareholders, provided that a number of technical REIT qualification requirements are satisfied on a continuing basis. In general, an entity that fails to qualify as a REIT is subject to federal and state income tax as a
regular corporation, and distributions it makes to its shareholders are not deductible in computing its income tax.



During the course of the due diligence investigation and negotiations leading to the merger agreement with Colonial, several technical REIT qualification
tax issues were identified. On January 25, 2005, the company signed a closing agreement with the IRS resolving specified tax matters in connection with the companys investment in Cornerstone Acquisition Company, one of its subsidiaries, and
resolving other tax matters. Under the closing agreement, the company paid $100,000 to the IRS. The closing agreement also provides that the company will not be assessed any additional tax, interest or penalties, and does not require the company to
pay dividends to any of its shareholders or make any other adjustments, in connection with the resolution of the tax matters addressed by the IRS agreement.



59



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CORNERSTONE REALTY INCOME, INC.



SCHEDULE III



REAL ESTATE AND ACCUMULATED
DEPRECIATION (As of December 31, 2004)



|                                                                                |  |                 |            |               |   |                                |      |                      |              |       |   |           |  |                |           |               |   |            |  |   |            |  |   |           |  |      |  |                |  |          
|------------------------------------------------------------------------------- |  | --------------- | ---------- | ------------- | - | ------------------------------ | ---- | -------------------- | ------------ | ----- | - | --------- |  | -------------- | --------- | ------------- | - | ---------- |  | - | ---------- |  | - | --------- |  | ---- |  | -------------- |  | ---------
|Description                                                                     |  | Encumbrances(2) |            | Initial Cost  |   | Subsequently Capitalized Impr. |      | Gross Amount Carried |              | Total |   | Acc. Dep. |  | Date of Const. |           | Date Acquired |   | Dep. Life 
|                                                                                |  | Land            |            | Bldg. & Impr. |   |                                | Land |                      | Bldg. &Impr. |       |   |           |  |               
|1) Mayflower Seaside * Virginia Beach, VA * Multi-family housing * Retail shops |  | $               | 10,500,000 |               | $ | 2,258,169                      |      | $                    | 5,375,975    |       | $ | 5,951,158 |  | $              | 2,258,248 |               | $ | 11,327,054 |  | $ | 13,585,302 |  | $ | 4,304,994 |  | 1950 |  | Oct. 26, 1993  |  | 27.5 yrs.
|2) Harbour Club * Virginia Beach, VA * Multi-family housing                     |  |                 | 8,237,279  |               |   | 1,019,895                      |      |                      | 4,230,105    |       |   | 2,479,647 |  |                | 1,020,275 |               |   | 6,709,372  |  |   | 7,729,647  |  |   | 5,622,112 |  | 1988 |  | May 1, 1994    |  | 27.5 yrs.
|3) The Trestles * Raleigh, NC * Multi-family housing                            |  |                 |           |               |   | 2,650,884                      |      |                      | 7,699,116    |       |   | 2,032,068 |  |                | 2,686,006 |               |   | 9,696,062  |  |   | 12,382,068 |  |   | 4,087,518 |  | 1987 |  | Dec. 30, 1994  |  | 27.5 yrs.
|4) Mill Creek * Winston-Salem, NC * Multi-family housing                        |  |                 | 6,207,500  |               |   | 1,368,000                      |      |                      | 7,182,000    |       |   | 2,181,224 |  |                | 1,417,614 |               |   | 9,313,610  |  |   | 10,731,224 |  |   | 3,385,727 |  | 1984 |  | Sept. 1, 1995  |  | 27.5 yrs.
|5) Glen Eagles                                                                  |  |                 | 10,010,000 |               |   | 1,095,000                      |      |                      | 6,205,000    |       |   | 2,211,844 |  |                | 3,383,400 |               |   | 15,716,097 |  |   | 19,099,497 |  |   | 4,387,943 |  | 1990 |  | Oct. 1, 1995   |  | 27.5 yrs.
|Prestwick *Winston-Salem, NC * Multi-family housing                             |  |                 |            |               |   | 2,492,790                      |      |                      | 7,094,863    |       |   |           |  |                |           |               |   |            |  |   |            |  |   |           |  | 2000 |  | Sept. 11, 2000 |  | 27.5 yrs.
|6) Tradewinds * Hampton, VA * Multi-family housing                              |  |                 | 10,738,586 |               |   | 1,428,000                      |      |                      | 8,772,000    |       |   | 2,551,470 |  |                | 1,436,890 |               |   | 11,314,580 |  |   | 12,751,470 |  |   | 4,241,089 |  | 1988 |  | Nov. 1, 1995   |  | 27.5 yrs.
|7) The Meadows                                                                  |  |                 | 14,885,000 |               |   | 186,000                        |      |                      | 6,014,000    |       |   | 2,105,497 |  |                | 625,417   |               |   | 19,316,080 |  |   | 19,941,497 |  |   | 4,430,480 |  | 1974 |  | Jan. 31, 1996  |  | 27.5 yrs.
|Enclave                                                                         |  |                 |            |               |   | 351,440                        |      |                      | 8,434,560    |       |   |           |  |                |           |               |   |            |  |   |            |  |   |           |  | 2000 |  | Mar. 16, 2000  |  | 27.5 yrs.
|Phase 2 Section 2 * Asheville, NC * Multi-family housing                        |  |                 |            |               |   | 114,000                        |      |                      | 2,736,000    |       |   |           |  |                |           |               |   |            |  |   |            |  |   |           |  | 2001 |  | May 7, 2001    |  | 27.5 yrs.
|8) Ashley Park * Richmond, VA * Multi-family housing                            |  |                 | 9,500,000  |               |   | 1,586,650                      |      |                      | 10,618,350   |       |   | 1,944,135 |  |                | 1,589,251 |               |   | 12,559,884 |  |   | 14,149,135 |  |   | 4,483,459 |  | 1988 |  | March 1, 1996  |  | 27.5 yrs.
|9) Arbor Trace * Virginia Beach, VA * Multi-family housing                      |  |                 | 5,000,000  |               |   | 1,100,000                      |      |                      | 3,900,000    |       |   | 1,548,546 |  |                | 1,130,750 |               |   | 5,417,796  |  |   | 6,548,546  |  |   | 2,086,813 |  | 1985 |  | March 1, 1996  |  | 27.5 yrs.
|10) Bridgetown Bay * Charlotte, NC * Multi-family housing                       |  |                 |           |               |   | 603,000                        |      |                      | 4,422,000    |       |   | 1,571,706 |  |                | 624,234   |               |   | 5,972,472  |  |   | 6,596,706  |  |   | 2,148,025 |  | 1986 |  | April 1, 1996  |  | 27.5 yrs.



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2004)(Continued)



|                                                                    |  |                 |  |               |  |                                |      |                     |              |           |  |            |  |                |  |               |  |           |  |                |  |          
|------------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------ | --------- |  | ---------- |  | -------------- |  | ------------- |  | --------- |  | -------------- |  | ---------
|Description                                                         |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |              | Total     |  | Acc. Dep.  |  | Date of Const. |  | Date Acquired |  | Dep. Life
|                                                                    |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. &Impr. |           |  |            |  |               
|11) Trophy Chase * Charlottesville, VA * Multi-family housing       |  | 15,000,000      |  | 2,455,980     |  | 10,173,011                     |      | 7,111,104           |              | 2,483,638 |  | 17,256,457 |  | 19,740,095     |  | 5,641,189     |  | 1970      |  | April 1, 1996  |  | 27.5 yrs.
|12) Beacon Hill * Charlotte, NC * Multi-family housing              |  |                |  | 3,121,587     |  | 10,457,616                     |      | 3,450,308           |              | 3,076,215 |  | 13,953,296 |  | 17,029,511     |  | 4,958,402     |  | 1985      |  | May 1, 1996    |  | 27.5 yrs.
|13) Summerwalk * Concord, NC * Multi-family housing                 |  | 6,000,000       |  | 1,528,200     |  | 4,131,800                      |      | 2,653,003           |              | 1,565,050 |  | 6,747,953  |  | 8,313,003      |  | 2,602,964     |  | 1983      |  | May 1, 1996    |  | 27.5 yrs.
|14) The Landing * Raleigh, NC * Multi-family housing                |  | 7,442,500       |  | 1,001,400     |  | 7,343,600                      |      | 2,705,227           |              | 1,023,951 |  | 10,026,276 |  | 11,050,227     |  | 3,503,752     |  | 1984      |  | May 1, 1996    |  | 27.5 yrs.
|15) Meadow Creek * Pineville, NC * Multi-family housing             |  | 9,277,751       |  | 1,110,000     |  | 9,990,000                      |      | 3,000,189           |              | 1,134,435 |  | 12,965,754 |  | 14,100,189     |  | 4,549,059     |  | 1984      |  | May 31, 1996   |  | 27.5 yrs.
|16) Trolley Square                                                  |  | 9,500,000       |  | 1,620,000     |  | 4,380,000                      |      | 4,638,764           |              | 2,817,600 |  | 12,063,739 |  | 14,881,339     |  | 4,645,471     |  | 1968      |  | June 25, 1996  |  | 27.5 yrs.
|Trolley Square West * Richmond, VA * Multi-family housing           |  |                 |  | 1,145,495     |  | 3,097,080                      |      |                     |              |           |  |            |  |                |  |               |  | 1964      |  | Dec. 31, 1996  |  | 27.5 yrs.
|17) Paces Glen * Charlotte, NC * Multi-family housing               |  |                |  | 2,153,250     |  | 5,271,750                      |      | 1,806,709           |              | 2,226,399 |  | 7,005,310  |  | 9,231,709      |  | 2,399,572     |  | 1986      |  | July 19, 1996  |  | 27.5 yrs.
|18) Hampton Glen * Richmond, VA * Multi-family housing              |  | 12,253,292      |  | 1,391,992     |  | 10,207,939                     |      | 2,670,973           |              | 1,419,188 |  | 12,851,716 |  | 14,270,904     |  | 4,332,570     |  | 1986      |  | August 1, 1996 |  | 27.5 yrs.
|19) Heatherwood                                                     |  | 16,250,000      |  | 2,449,310     |  | 7,756,147                      |      | 10,105,046          |              | 4,186,842 |  | 23,548,661 |  | 27,735,503     |  | 8,865,059     |  | 1980      |  | Sept. 1, 1996  |  | 27.5 yrs.
|Italian Village/Villa Marina * Charlotte, NC * Multi-family housing |  |                 |  | 1,707,750     |  | 5,717,250                      |      |                     |              |           |  |            |  |                |  |               |  | 1980      |  | Aug. 29, 1997  |  | 27.5 yrs.
|20) Highland Hills * Carrboro, NC * Multi-family housing            |  | 14,360,566      |  | 1,210,000     |  | 10,890,000                     |      | 3,709,995           |              | 1,198,725 |  | 14,611,270 |  | 15,809,995     |  | 5,226,994     |  | 1987      |  | Sept. 27, 1996 |  | 27.5 yrs.
|21) Parkside at Woodlake * Durham, NC * Multi-family housing        |  | 11,000,000      |  | 2,932,778     |  | 11,731,108                     |      | 1,521,512           |              | 2,884,919 |  | 13,300,479 |  | 16,185,398     |  | 4,461,393     |  | 1996      |  | Aug. 31, 1996  |  | 27.5 yrs.



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2004)(Continued)



|                                                            |  |                 |  |               |  |                                |      |                     |              |           |  |            |  |                |  |               |  |           |  |                |  |          
|----------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------ | --------- |  | ---------- |  | -------------- |  | ------------- |  | --------- |  | -------------- |  | ---------
|Description                                                 |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |              | Total     |  | Acc. Dep.  |  | Date of Const. |  | Date Acquired |  | Dep. Life
|                                                            |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. &Impr. |           |  |            |  |               
|22) Greenbrier * Fredericksburg, VA * Multi-family housing  |  | 12,392,366      |  | 998,957       |  | 10,100,568                     |      | 1,972,910           |              | 1,009,698 |  | 12,062,737 |  | 13,072,435     |  | 4,328,206     |  | 1980      |  | Oct. 1, 1996   |  | 27.5 yrs.
|23) Deerfield * Durham, NC * Multi-family housing           |  | 9,887,239       |  | 427,000       |  | 10,248,000                     |      | 1,364,829           |              | 430,416   |  | 11,609,413 |  | 12,039,829     |  | 3,830,959     |  | 1985      |  | Nov. 1, 1996   |  | 27.5 yrs.
|24) Westchase * Charleston, SC * Multi-family housing       |  |                |  | 1,980,000     |  | 9,020,000                      |      | 3,567,297           |              | 2,012,328 |  | 12,554,969 |  | 14,567,297     |  | 4,499,867     |  | 1985      |  | Jan. 15, 1997  |  | 27.5 yrs.
|25) Carlyle Club * Lawrenceville, GA * Multi-family housing |  | 7,250,000       |  | 3,589,800     |  | 7,990,200                      |      | 3,561,791           |              | 3,607,026 |  | 11,534,765 |  | 15,141,791     |  | 4,045,193     |  | 1974      |  | Apr. 30, 1997  |  | 27.5 yrs.
|26) Ashley Run * Norcross, GA * Multi-family housing        |  |                |  | 3,780,000     |  | 14,220,000                     |      | 5,048,174           |              | 3,793,622 |  | 19,254,552 |  | 23,048,174     |  | 6,089,979     |  | 1987      |  | Apr. 30, 1997  |  | 27.5 yrs.
|27) Charleston Place * Charlotte, NC * Multi-family housing |  |                |  | 1,516,000     |  | 7,959,000                      |      | 1,670,609           |              | 1,534,601 |  | 9,611,008  |  | 11,145,609     |  | 3,066,357     |  | 1986      |  | May 13, 1997   |  | 27.5 yrs.
|28) Dunwoody Springs * Dunwoody, GA * Multi-family housing  |  | 13,325,000      |  | 3,648,000     |  | 11,552,000                     |      | 7,479,003           |              | 3,662,295 |  | 19,016,708 |  | 22,679,003     |  | 6,333,505     |  | 1981      |  | July 25, 1997  |  | 27.5 yrs.
|29) Clarion Crossing                                        |  | 9,050,000       |  | 2,860,000     |  | 7,740,000                      |      | 1,088,136           |              | 3,235,961 |  | 12,077,663 |  | 15,313,624     |  | 2,911,948     |  | 1972      |  | Sept. 30, 1997 |  | 27.5 yrs.
|Phase II * Raleigh, NC * Multi-family housing               |  |                 |  | 320,000       |  | 3,305,488                      |      |                     |              |           |  |            |  |                |  |               |  | 2002      |  | Sept. 30, 1997 |  | 27.5 yrs.
|30) Stone Brook * Norcross, GA * Multi-family housing       |  |                |  | 1,570,000     |  | 6,280,000                      |      | 2,437,816           |              | 1,582,469 |  | 8,705,347  |  | 10,287,816     |  | 2,743,523     |  | 1986      |  | Oct. 31, 1997  |  | 27.5 yrs.
|31) St. Regis * Raleigh, NC * Multi-family housing          |  |                |  | 2,156,000     |  | 7,644,000                      |      | 1,683,151           |              | 2,169,687 |  | 9,313,464  |  | 11,483,151     |  | 2,651,193     |  | 1986      |  | Oct. 31, 1997  |  | 27.5 yrs.
|32) Remington Place * Raleigh, NC * Multi-family housing    |  |                |  | 1,422,000     |  | 6,478,000                      |      | 1,460,950           |              | 1,433,609 |  | 7,927,341  |  | 9,360,950      |  | 2,248,325     |  | 1985      |  | Oct. 31, 1997  |  | 27.5 yrs.



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2004)(Continued)



|                                                           |  |                 |  |               |  |                                |      |                     |              |           |  |            |  |                |  |               |  |           |  |               |  |          
|---------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------ | --------- |  | ---------- |  | -------------- |  | ------------- |  | --------- |  | ------------- |  | ---------
|Description                                                |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |              | Total     |  | Acc. Dep.  |  | Date of Const. |  | Date Acquired |  | Dep. Life
|                                                           |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. &Impr. |           |  |            |  |               
|33) Stone Point * Charlotte, NC * Multi-family housing     |  |                |  | 1,164,000     |  | 8,536,000                      |      | 1,249,708           |              | 1,119,156 |  | 9,830,552  |  | 10,949,708     |  | 2,786,151     |  | 1986      |  | Jan. 15, 1998 |  | 27.5 yrs.
|34) Pinnacle Ridge * Ashville, NC * Multi-family housing   |  | 4,842,038       |  | 1,547,410     |  | 4,183,740                      |      | 1,791,697           |              | 1,572,517 |  | 5,950,330  |  | 7,522,847      |  | 1,746,932     |  | 1951      |  | April 1, 1998 |  | 27.5 yrs.
|35) Hampton Pointe * Charleston, SC * Multi-family housing |  |                |  | 1,589,250     |  | 10,635,750                     |      | 5,210,826           |              | 1,651,535 |  | 15,784,291 |  | 17,435,826     |  | 4,602,227     |  | 1986      |  | Mar 31, 1998  |  | 27.5 yrs.
|36) The Timbers * Raleigh, NC * Multi-family housing       |  |                |  | 1,944,000     |  | 6,156,000                      |      | 1,349,663           |              | 1,955,739 |  | 7,493,924  |  | 9,449,663      |  | 2,193,203     |  | 1983      |  | June 4, 1998  |  | 27.5 yrs.
|37) The Gables * Richmond, VA * Multi-family housing       |  | 8,000,000       |  | 2,185,000     |  | 9,315,000                      |      | 2,171,020           |              | 2,200,817 |  | 11,470,203 |  | 13,671,020     |  | 3,325,418     |  | 1987      |  | July 2, 1998  |  | 27.5 yrs.
|38) Spring Lake * Morrow, GA * Multi-family housing        |  |                |  | 900,000       |  | 8,100,000                      |      | 1,884,521           |              | 907,579   |  | 9,976,942  |  | 10,884,521     |  | 2,773,205     |  | 1986      |  | Aug. 12, 1998 |  | 27.5 yrs.
|39) Cape Landing * Myrtle Beach, SC * Multi-family housing |  | 9,000,000       |  | 1,026,000     |  | 16,074,000                     |      | 2,839,818           |              | 1,024,972 |  | 18,914,846 |  | 19,939,818     |  | 5,179,481     |  | 1997/98   |  | Oct. 16, 1998 |  | 27.5 yrs.
|40) Brookfield * Dallas, TX * Multi-family housing         |  |                |  | 1,624,051     |  | 6,390,482                      |      | 209,964             |              | 1,579,820 |  | 6,644,677  |  | 8,224,497      |  | 2,009,676     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.
|41) Eagle Crest * Irving, TX * Multi-family housing        |  | 15,000,000      |  | 4,038,424     |  | 17,527,893                     |      | 1,596,009           |              | 4,038,425 |  | 19,123,901 |  | 23,162,326     |  | 4,419,010     |  | 1983      |  | July 23, 1999 |  | 27.5 yrs.
|42) Aspen Hills * Arlington, TX * Multi-family housing     |  |                |  | 1,129,071     |  | 6,094,651                      |      | 970,654             |              | 1,129,071 |  | 7,065,305  |  | 8,194,376      |  | 2,327,176     |  | 1979      |  | July 23, 1999 |  | 27.5 yrs.
|43) Mill Crossing * Arlington, TX * Multi-family housing   |  |                |  | 803,095       |  | 4,466,697                      |      | 627,386             |              | 803,061   |  | 5,094,117  |  | 5,897,178      |  | 1,667,688     |  | 1979      |  | July 23, 1999 |  | 27.5 yrs.
|44) Wildwood * Euless, TX * Multi-family housing           |  | 3,289,296       |  | 881,479       |  | 3,589,815                      |      | 539,666             |              | 881,538   |  | 4,129,422  |  | 5,010,960      |  | 1,272,933     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.



63



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2004)(Continued)



|                                                                    |  |                 |  |               |  |                                |      |                     |              |           |  |            |  |                |  |               |  |           |  |               |  |          
|------------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------ | --------- |  | ---------- |  | -------------- |  | ------------- |  | --------- |  | ------------- |  | ---------
|Description                                                         |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |              | Total     |  | Acc. Dep.  |  | Date of Const. |  | Date Acquired |  | Dep. Life
|                                                                    |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. &Impr. |           |  |            |  |               
|45) Toscana Apartments * Dallas, TX * Multi-family housing          |  | 5,250,000       |  | 998,938       |  | 6,335,085                      |      | 375,348             |              | 1,048,886 |  | 6,660,485  |  | 7,709,371      |  | 1,646,277     |  | 1986      |  | July 23, 1999 |  | 27.5 yrs.
|46) The Arbors on Forest Ridge * Bedford, TX * Multi-family housing |  | 6,250,000       |  | 862,803       |  | 8,711,151                      |      | 750,930             |              | 1,012,318 |  | 9,312,566  |  | 10,324,884     |  | 2,211,814     |  | 1986      |  | July 23, 1999 |  | 27.5 yrs.
|47) Paces Cove * Dallas, TX * Multi-family housing                  |  | 10,801,470      |  | 2,259,317     |  | 9,453,562                      |      | 1,179,412           |              | 2,219,403 |  | 10,672,888 |  | 12,892,291     |  | 2,672,126     |  | 1982      |  | July 23, 1999 |  | 27.5 yrs.
|48) Remington Hills * Irving, TX * Multi-family housing             |  | 14,250,000      |  | 4,509,071     |  | 16,412,148                     |      | 5,754,148           |              | 4,209,109 |  | 22,466,258 |  | 26,675,367     |  | 5,317,512     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.
|49) Copper Crossing * Fort Worth, TX * Multi-family housing         |  |                |  | 1,782,562     |  | 9,994,421                      |      | 1,579,199           |              | 1,778,407 |  | 11,577,775 |  | 13,356,182     |  | 3,541,250     |  | 1980/1981 |  | July 23, 1999 |  | 27.5 yrs.
|50) Main Park * Duncanville, TX * Multi-family housing              |  | 8,189,381       |  | 619,641       |  | 8,463,326                      |      | 751,706             |              | 670,948   |  | 9,163,725  |  | 9,834,673      |  | 2,326,741     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.
|51) Timberglen * Dallas, TX * Multi-family housing                  |  | 9,500,000       |  | 2,563,522     |  | 10,657,083                     |      | 1,426,395           |              | 2,548,093 |  | 12,098,907 |  | 14,647,000     |  | 3,285,741     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.
|52) Silverbrook I * Grand Prairie, TX * Multi-family housing        |  | 15,100,731      |  | 3,352,896     |  | 12,356,997                     |      | 2,691,516           |              | 3,321,138 |  | 15,080,271 |  | 18,401,409     |  | 4,598,089     |  | 1982      |  | July 23, 1999 |  | 27.5 yrs.
|53) Summer Tree * Dallas, TX * Multi-family housing                 |  | 7,532,615       |  | 3,338,748     |  | 4,385,408                      |      | 1,255,588           |              | 3,156,485 |  | 5,823,259  |  | 8,979,744      |  | 1,907,883     |  | 1980      |  | July 23, 1999 |  | 27.5 yrs.
|54) Park Village * Bedford, TX * Multi-family housing               |  | 8,261,577       |  | 928,744       |  | 7,295,797                      |      | 933,636             |              | 954,543   |  | 8,203,634  |  | 9,158,177      |  | 2,294,456     |  | 1983      |  | July 23, 1999 |  | 27.5 yrs.
|55) Cottonwood * Arlington, TX * Multi-family housing               |  | 5,857,850       |  | 474,344       |  | 5,797,412                      |      | 1,445,534           |              | 473,617   |  | 7,243,673  |  | 7,717,290      |  | 2,019,115     |  | 1985      |  | July 23, 1999 |  | 27.5 yrs.
|56) Devonshire * Dallas, TX * Multi-family housing                  |  | 3,461,912       |  | 1,892,165     |  | 5,672,727                      |      | 924,707             |              | 1,893,381 |  | 6,596,218  |  | 8,489,599      |  | 2,071,839     |  | 1978      |  | July 23, 1999 |  | 27.5 yrs.



64



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2004)(Continued)



|                                                                 |  |                 |  |               |  |                                |      |                     |              |           |  |            |  |                |  |               |  |           |  |               |  |          
|---------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------ | --------- |  | ---------- |  | -------------- |  | ------------- |  | --------- |  | ------------- |  | ---------
|Description                                                      |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |              | Total     |  | Acc. Dep.  |  | Date of Const. |  | Date Acquired |  | Dep. Life
|                                                                 |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. &Impr. |           |  |            |  |               
|57) Paces Point * Lewisville, TX * Multi-family housing          |  |                |  | 2,132,795     |  | 10,847,450                     |      | 1,154,363           |              | 2,132,694 |  | 12,001,914 |  | 14,134,608     |  | 3,137,934     |  | 1985      |  | July 23, 1999 |  | 27.5 yrs.
|58) The Meridian * Austin, TX * Multi-family housing             |  | 5,460,000       |  | 531,832       |  | 7,007,392                      |      | 1,217,844           |              | 531,470   |  | 8,225,598  |  | 8,757,068      |  | 2,241,833     |  | 1988      |  | July 23, 1999 |  | 27.5 yrs.
|59) Grayson II * Grapevine, TX * Multi-family housing            |  | 17,550,000      |  | 962,939       |  | 11,247,182                     |      | 905,270             |              | 913,574   |  | 12,201,817 |  | 13,115,391     |  | 3,172,997     |  | 1986      |  | July 23, 1999 |  | 27.5 yrs.
|60) Silverbrook II * Grand Prairie, TX * Multi-family housing    |  | 2,771,525       |  | 1,202,745     |  | 4,605,505                      |      | 766,726             |              | 1,177,125 |  | 5,397,851  |  | 6,574,976      |  | 1,541,733     |  | 1984      |  | July 23, 1999 |  | 27.5 yrs.
|61) Estrada Oaks * Irving, TX * Multi-family housing             |  | 9,115,013       |  | 1,939,650     |  | 8,847,232                      |      | 951,666             |              | 1,929,232 |  | 9,809,316  |  | 11,738,548     |  | 2,486,431     |  | 1983      |  | July 23, 1999 |  | 27.5 yrs.
|62) Burney Oaks * Arlington, TX * Multi-family housing           |  | 8,243,601       |  | 1,063,277     |  | 8,901,959                      |      | 1,190,483           |              | 1,063,209 |  | 10,092,510 |  | 11,155,719     |  | 2,756,617     |  | 1985      |  | July 23, 1999 |  | 27.5 yrs.
|63) Cutters Point * Richardson, TX * Multi-family housing       |  | 6,250,000       |  | 2,001,796     |  | 7,858,044                      |      | 1,706,166           |              | 2,001,917 |  | 9,564,089  |  | 11,566,006     |  | 2,825,498     |  | 1978      |  | July 23, 1999 |  | 27.5 yrs.
|64) The Courts on Pear Ridge * Dallas, TX * Multi-family housing |  | 10,278,374      |  | 2,360,962     |  | 9,482,729                      |      | 646,780             |              | 2,360,994 |  | 10,129,477 |  | 12,490,471     |  | 2,426,952     |  | 1988      |  | July 23, 1999 |  | 27.5 yrs.
|65) Sierra Ridge * San Antonio, TX * Multi-family housing        |  | 4,750,000       |  | 611,683       |  | 6,012,983                      |      | 2,136,235           |              | 610,950   |  | 8,149,951  |  | 8,760,901      |  | 2,350,433     |  | 1981      |  | July 23, 1999 |  | 27.5 yrs.
|66) Grayson I * Grapevine, TX * Multi-family housing             |  |                |  | 770,541       |  | 9,178,418                      |      | 2,339,399           |              | 863,675   |  | 11,424,683 |  | 12,288,358     |  | 2,903,778     |  | 1985      |  | July 23, 1999 |  | 27.5 yrs.
|67) Canyon Hills * Austin, TX * Multi-family housing             |  | 12,319,470      |  | 1,233,883     |  | 11,278,619                     |      | 515,066             |              | 1,235,409 |  | 11,792,159 |  | 13,027,568     |  | 2,710,880     |  | 1996      |  | July 23, 1999 |  | 27.5 yrs.
|68) Greystone Crossing * Charlotte, NC * Multi-family housing    |  |                |  | 1,340,000     |  | 25,460,000                     |      | 1,471,116           |              | 1,332,636 |  | 26,938,480 |  | 28,271,116     |  | 4,939,609     |  | 1998/2000 |  | May 8, 2000   |  | 27.5 yrs.



65



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2004)(Continued)



|                                                                     |  |                 |  |               |  |                                |      |                     |              |           |  |            |  |                |  |               |  |           |  |                |  |          
|-------------------------------------------------------------------- |  | --------------- |  | ------------- |  | ------------------------------ | ---- | ------------------- | ------------ | --------- |  | ---------- |  | -------------- |  | ------------- |  | --------- |  | -------------- |  | ---------
|Description                                                          |  | Encumbrances(2) |  | Initial Cost  |  | Subsequently Capitalized Impr. |      | Gross AmountCarried |              | Total     |  | Acc. Dep.  |  | Date of Const. |  | Date Acquired |  | Dep. Life
|                                                                     |  | Land            |  | Bldg. & Impr. |  |                                | Land |                     | Bldg. &Impr. |           |  |            |  |               
|69) Chase Gayton * Richmond, VA * Multi-family housing               |  | 15,394,349      |  | 2,541,000     |  | 18,634,000                     |      | 1,646,972           |              | 2,534,142 |  | 20,287,830 |  | 22,821,972     |  | 2,853,389     |  | 1984      |  | June 21, 2001  |  | 27.5 yrs.
|70) Poplar Place * Kennesaw, GA * Multi-family housing               |  | 19,585,929      |  | 5,544,000     |  | 29,106,000                     |      | 4,272,341           |              | 5,760,880 |  | 33,161,461 |  | 38,922,341     |  | 4,553,120     |  | 1989/1995 |  | Sept. 7, 2001  |  | 27.5 yrs.
|71) Autumn Park                                                      |  | 24,563,522      |  | 2,007,433     |  | 18,066,894                     |      | 192,387             |              | 3,021,152 |  | 28,199,856 |  | 31,221,008     |  | 2,647,522     |  | 2001      |  | Oct. 1, 2001   |  | 27.5 yrs.
|Autumn Park Phase II * Greensboro, NC * Multi-family housing         |  |                 |  | 1,081,629     |  | 9,872,665                      |      |                     |              |           |  |            |  |                |  |               |  | 2004      |  | March 26, 2004 |  | 27.5 yrs.
|72) Legacy Park * Charlotte, NC * Multi-family housing               |  | 13,700,000      |  | 1,313,311     |  | 20,575,211                     |      | 223,685             |              | 1,266,330 |  | 20,845,877 |  | 22,112,207     |  | 2,666,846     |  | 2001      |  | Oct. 1, 2001   |  | 27.5 yrs.
|73) Timber Crest * Charlotte, NC * Multi-family housing              |  | 14,813,786      |  | 1,144,569     |  | 17,931,580                     |      | 480,602             |              | 1,270,359 |  | 18,286,392 |  | 19,556,751     |  | 2,395,235     |  | 2000      |  | Oct. 1, 2001   |  | 27.5 yrs.
|74) Trinity Commons                                                  |  | 27,555,398      |  | 2,429,700     |  | 19,658,481                     |      | 835,760             |              | 4,063,154 |  | 34,578,492 |  | 38,641,646     |  | 3,983,377     |  | 2000      |  | Oct. 1, 2001   |  | 27.5 yrs.
|Trinity Commons Phase II * Raleigh, NC * Multi-family housing        |  |                 |  | 1,728,948     |  | 13,988,757                     |      |                     |              |           |  |            |  |                |  |               |  | 2002      |  | July 30, 2002  |  | 27.5 yrs.
|75) St. Andrews                                                      |  | 18,044,701      |  | 682,725       |  | 16,385,411                     |      | 816,262             |              | 1,054,370 |  | 27,131,181 |  | 28,185,551     |  | 3,444,605     |  | 1998      |  | Oct. 1, 2001   |  | 27.5 yrs.
|St. Andrews Phase II * Wilmington, NC * Multi-family housing         |  |                 |  | 407,486       |  | 9,893,667                      |      |                     |              |           |  |            |  |                |  |               |  | 2002      |  | March 20, 2002 |  | 27.5 yrs.
|76) Waterford * Richmond, VA * Multi-family housing                  |  | 16,390,582      |  | 2,700,000     |  | 19,800,000                     |      | 1,527,698           |              | 2,732,357 |  | 21,295,341 |  | 24,027,698     |  | 2,631,372     |  | 1989      |  | Dec. 10, 2001  |  | 27.5 yrs.
|77) The Enclave @ South Tryon * Charlotte, NC * Multi-family housing |  |                |  | 805,000       |  | 15,295,000                     |      | 332,594             |              | 785,882   |  | 15,646,712 |  | 16,432,594     |  | 1,254,976     |  | 2002      |  | Dec. 2, 2002   |  | 27.5 yrs.
|78) Windsor Heights * Irving, TX * Multi-family housing              |  | 25,266,500      |  | 3,480,554     |  | 25,524,062                     |      | 840,917             |              | 3,429,698 |  | 26,415,835 |  | 29,845,533     |  | 2,176,154     |  | 1997      |  | Dec. 23, 2002  |  | 27.5 yrs.
|79) Greentree * Savannah, GA * Multi-family housing                  |  | 7,400,543       |  | 776,246       |  | 10,189,800                     |      | 444,597             |              | 776,246   |  | 10,634,397 |  | 11,410,643     |  | 699,773       |  | 1984      |  | May 28, 2003   |  | 27.5 yrs.



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REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 2004)(Continued)



|                                                                    |  |                 |             |               |   |                                |      |                      |               |       |   |             |           |   |                |  |               |               |           |   |               |     |  |   |             |  |      |  |             |  |          
|------------------------------------------------------------------- |  | --------------- | ----------- | ------------- | - | ------------------------------ | ---- | -------------------- | ------------- | ----- | - | ----------- | --------- | - | -------------- |  | ------------- | ------------- | --------- | - | ------------- | --- |  | - | ----------- |  | ---- |  | ----------- |  | ---------
|Description                                                         |  | Encumbrances(2) |             | Initial Cost  |   | Subsequently Capitalized Impr. |      | Gross Amount Carried |               | Total |   |             | Acc. Dep. |   | Date of Const. |  | Date Acquired |               | Dep. Life
|                                                                    |  | Land            |             | Bldg. & Impr. |   |                                | Land |                      | Bldg. & Impr. |       |   |             |           |  
|80) Hammocks * Savannah, GA * Multi-family housing                  |  |                 | 21,932,988  |               |   | 1,228,691                      |      |                      | 24,163,758    |       |   | 529,865     |           |   | 1,228,691      |  |               | 24,693,623    |           |   | 25,922,314    |     |  |   | 1,583,234   |  | 1997 |  | May 28,2003 |  | 27.5 yrs.
|81) Huntington * Savannah, GA * Multi-family housing                |  |                 | 5,443,321   |               |   | 710,817                        |      |                      | 7,580,382     |       |   | 206,204     |           |   | 710,817        |  |               | 7,786,586     |           |   | 8,497,403     |     |  |   | 494,864     |  | 1986 |  | May 28,2003 |  | 27.5 yrs.
|82) Marsh Cove * Savannah, GA * Multi-family housing                |  |                 | 8,987,710   |               |   | 782,389                        |      |                      | 11,114,614    |       |   | 826,996     |           |   | 782,389        |  |               | 11,941,610    |           |   | 12,723,999    |     |  |   | 808,956     |  | 1983 |  | May 28,2003 |  | 27.5 yrs.
|83) Merrritt at Whitemarsh * Savannah, GA * Multi-family housing    |  |                 | 22,983,741  |               |   | 1,760,228                      |      |                      | 21,095,159    |       |   | 183,089     |           |   | 1,760,228      |  |               | 21,278,248    |           |   | 23,038,476    |     |  |   | 1,332,129   |  | 2002 |  | May 28,2003 |  | 27.5 yrs.
|84) Merritt at James Island * Charleston, SC * Multi-family housing |  |                 | 17,868,758  |               |   | 2,159,767                      |      |                      | 22,684,446    |       |   | 89,048      |           |   | 2,159,767      |  |               | 22,773,494    |           |   | 24,933,261    |     |  |   | 1,409,948   |  | 2002 |  | May 28,2003 |  | 27.5 yrs.
|85) Quarterdeck * Charleston, SC * Multi-family housing             |  |                 | 10,974,699  |               |   | 988,008                        |      |                      | 14,836,650    |       |   | 261,672     |           |   | 988,008        |  |               | 15,098,322    |           |   | 16,086,330    |     |  |   | 1,078,740   |  | 1987 |  | May 28,2003 |  | 27.5 yrs.
|86) Waters Edge * Summerville, SC * Multi-family housing            |  |                 | 7,928,129   |               |   | 1,074,675                      |      |                      | 9,285,890     |       |   | 371,738     |           |   | 1,074,675      |  |               | 9,657,628     |           |   | 10,732,303    |     |  |   | 610,647     |  | 1985 |  | May 28,2003 |  | 27.5 yrs.
|87) Windsor Place * Goose Creek, SC * Multi-family housing          |  |                 | 10,086,816  |               |   | 1,580,350                      |      |                      | 12,464,671    |       |   | 311,102     |           |   | 1,580,350      |  |               | 12,775,773    |           |   | 14,356,123    |     |  |   | 798,326     |  | 1985 |  | May 28,2003 |  | 27.5 yrs.
|Real Estate Under Development                                       |  |                 |            |               |   | 13,453,639                     |      |                      |              |       |   |            |           |   | 13,453,639     |  |               |              |           |   | 13,453,639    |     |  |   |             |  |      |  |             |  |          
|                                                                    |  |                 |             |               |   |                                |      |                      |               |       |   |             |           |   |                |  |               |               |           |   |               |     |  |   |             |  |      |  |             |  |          
|                                                                    |  | $               | 822,081,404 |               | $ | 173,297,126                    |      | $                    | 981,848,282   |       | $ | 168,188,485 |           | $ | 173,397,336    |  | $             | 1,149,936,557 |           | $ | 1,323,333,893 | (1) |  | $ | 272,227,491 |  |      |  |             |  |          

---

|(1) |  | The aggregate cost for Federal Income tax purposes was approximately $1.3 billion at December 31, 2004.
|--- |  | -------------------------------------------------------------------------------------------------------



|(2) |  | The total includes $93.8 million of debt secured by 17 apartment communities which is not allocated among the individual apartment communities.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                              
|            | 
|2.1         |  | Agreement and Plan of Merger among Cornerstone Realty Income Trust, Inc., Cornerstone Merger Sub, Inc. and Merry Land Properties, Inc.
dated February 19, 2003. (Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed February 26, 2003; SEC File No. 1-12875).                                                                                  
|            | 
|2.2         |  | Purchase and Sale Agreement dated February 19, 2003 by and among Merry Land Properties, Inc. and Merry Land & Investment Company, LLC.
(Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K filed February 26, 2003; SEC File No. 1-12875).                                                                                                           
|            | 
|2.3         |  | Agreement and Plan of Merger dated October 25, 2004, by and among Colonial Properties Trust, CLNL Acquisition Sub LLC and Cornerstone
Realty Income Trust, Inc. (Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed October 29, 2004; SEC File No. 1-12875).                                                                                   
|            | 
|2.4         |  | Amendment No. 1 to Agreement and Plan of Merger dated as of January 24, 2005, by and among Colonial Properties Trust, CLNL Acquisition Sub
LLC and Cornerstone Realty Income Trust, Inc. (Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed January 28, 2005; SEC File No. 1-12875).                                                          
|            | 
|3.1         |  | Amended and Restated Articles of Incorporation of Cornerstone Realty Income Trust, Inc., as amended. (Incorporated by reference to Exhibit
3.1 to Current Report on Form 8-K dated May 12, 1998; SEC File No. 1-12875).                                                                                                                                                  
|            | 
|3.2         |  | Articles of Amendment to the Amended and Restated Articles of Incorporation of Cornerstone Realty Income Trust, Inc. (Incorporated by
reference to Exhibit 3.2 to Current Report on Form 8-K dated July 23, 1999; SEC File No. 1-12875).                                                                                                                                 
|            | 
|3.3         |  | Bylaws of Cornerstone Realty Income Trust, Inc. (Amended Through February 13, 2003). (Incorporated by reference to Exhibit 3.3 to Annual
Report on Form 10-K filed March 28, 2003; SEC File No. 1-12875).                                                                                                                                                                
|            | 
|4.1         |  | Promissory Note dated September 27, 1999 in the principal amount of $50,550,000 made payable by Cornerstone Realty Income Trust, Inc. to
the order of The Prudential Insurance Company of America. (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                              
|            | 
|4.2         |  | Promissory Note dated September 27, 1999 in the principal amount of $22,950,000 made payable by CRIT-NC, LLC to the order of The Prudential
Insurance Company of America. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                       
|            | 
|4.3         |  | Mortgage and Security Agreement dated as of September 27, 1999 from Cornerstone Realty Income Trust, Inc., as borrower, to The Prudential
Insurance Company of America, as lender, pertaining to the Hampton Pointe and Westchase properties. (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).   
|            | 
|4.4         |  | Mortgage and Security Agreement dated as of September 27, 1999 from Cornerstone Realty Income Trust, Inc., as borrower, to The Prudential
Insurance Company of America, as lender, pertaining to the Arbors at Windsor Lake property. (Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).           
|            | 
|4.5         |  | Deed of Trust and Security Agreement dated as of September 27, 1999 made by CRIT-NC, LLC, as borrower, for the benefit of The Prudential
Insurance Company of America, as lender, pertaining to the Charleston Place and Stone Point properties. (Incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).
|            | 
|4.6         |  | Deed of Trust and Security Agreement dated as of September 27, 1999 made by CRIT-NC, LLC, as borrower, for the benefit of The Prudential
Insurance Company of America, as lender, pertaining to the St. Regis and Remington Place properties. (Incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).   



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 
|4.7         |  | Deed To Secure Debt and Security Agreement by Cornerstone Realty Income Trust, Inc., as borrower, to The Prudential Insurance Company of
America, as lender, pertaining to the Ashley Run, Stone Brook and Spring Lake properties. (Incorporated by reference to Exhibit 4.7 to Current Report on Form 8-K dated September 29, 1999; SEC File 1-12875).                                                                                   
|            | 
|4.8         |  | Assignment of Leases and Rents dated as of September 27, 1999, by Cornerstone Realty Income Trust, Inc. to The Prudential Insurance Company
of America (Charleston County, South Carolina). (Incorporated by reference to Exhibit 4.8 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                      
|            | 
|4.9         |  | Assignment of Leases and Rents dated as of September 27, 1999, by Cornerstone Realty Income Trust, Inc. to The Prudential Insurance Company
of America (Richland County, South Carolina). (Incorporated by reference to Exhibit 4.9 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                        
|            | 
|4.10        |  | Assignment of Leases and Rents dated as of September 27, 1999, by CRIT-NC, LLC to The Prudential Insurance Company of America (Mecklenburg
County, North Carolina). (Incorporated by reference to Exhibit 4.10 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                                             
|            | 
|4.11        |  | Assignment of Leases and Rents dated as of September 27, 1999, by Cornerstone Realty Income Trust, Inc. to The Prudential Insurance Company
of America (Clayton County, Georgia). (Incorporated by reference to Exhibit 4.11 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                               
|            | 
|4.12        |  | Assignment of Leases and Rents dated as of September 27, 1999, by Cornerstone Realty Income Trust, Inc. to The Prudential Insurance Company
of America (Gwinnett County, Georgia). (Incorporated by reference to Exhibit 4.12 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                              
|            | 
|4.13        |  | Assignment of Leases and Rents dated as of September 27, 1999, by CRIT-NC, LLC to The Prudential Insurance Company of America (Wake County,
North Carolina). (Incorporated by reference to Exhibit 4.13 to Current Report on Form 8-K dated September 29, 1999; SEC File No. 1-12875).                                                                                                                                                    
|            | 
|4.14        |  | Promissory Note dated December 12, 2000 in the principal amount of $10,500,000 made payable by CRIT-VA, Inc. to First Union National Bank,
with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.14 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                                                
|            | 
|4.15        |  | Indemnity and Guaranty Agreement dated as of December 12, 2000 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First
Union National Bank as Lender, in connection with a $10,500,000 loan to CRIT-VA, Inc. as Borrower, with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.15 to Current Report on Form 8-K dated
December 12, 2000; SEC File No. 1-12875).
|            | 
|4.16        |  | Deed of Trust and Security Agreement dated as of December 12, 2000, from CRIT-VA, Inc., as Grantor, to TRSTE, Inc. as Trustee for First
Union National Bank, the Beneficiary with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.16 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                              
|            | 
|4.17        |  | Assignment of Warranties and Other Contract Rights dated as of December 12, 2000 from CRIT-VA, Inc. as Borrower to First Union National
Bank as Lender with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.17 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                                    



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                      
|            | 
|4.18        |  | Assignment of Leases and Rents dated as of December 12, 2000 by CRIT-VA, Inc. as Assignor in favor of First Union National Bank as Assignee
with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.18 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                      
|            | 
|4.19        |  | Consent and Agreement of Manager dated as of December 12, 2000 by CRIT-VA, Inc. as Borrower in favor of First Union National Bank as Lender
with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.19 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                      
|            | 
|4.20        |  | Environmental Indemnity Agreement dated as of December 12, 2000 by CRIT-VA, Inc. and Cornerstone Realty Income Trust, Inc., as Indemnitors,
in favor of First Union National Bank, as Lender, with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.20 to Current Report on Form 8-K dated December 12, 2000; SEC File No.
1-12875).    
|            | 
|4.21        |  | Receipt and Closing Certificate dated December 12, 2000 by CRIT-VA, Inc. as Borrower and Cornerstone Realty Income Trust, Inc. as Guarantor
in favor of First Union National Bank, as Lender, with respect to the Mayflower Apartments in Virginia Beach, Virginia. (Incorporated by reference to Exhibit 10.21 to Current Report on Form 8-K dated December 12, 2000; SEC File No.
1-12875).    
|            | 
|4.22        |  | Schedule setting forth information on 14 substantially identical promissory notes (with respect to Exhibit 4.14) dated December 12, 2000 in
various principal amounts made payable to the order of First Union National Bank. (Incorporated by reference to Exhibit 10.24 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                          
|            | 
|4.23        |  | Schedule setting forth information on 14 substantially identical Indemnity and Guaranty Agreements (with respect to Exhibit 4.15) dated as
of December 12, 2000 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union National Bank as Lender. (Incorporated by reference to Exhibit 10.25 to Current Report on Form 8-K dated December 12, 2000; SEC File No.
1-12875).
|            | 
|4.24        |  | Schedule setting forth information on 14 substantially identical Deeds of Trust (with respect to Exhibit 4.16) dated as of December 12,
2000 with First Union National Bank as Beneficiary. (Incorporated by reference to Exhibit 10.26 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                            
|            | 
|4.25        |  | Schedule setting forth information on 14 substantially identical Assignments of Warranties and Other Contract Rights (with respect to
Exhibit 4.17) dated as of December 12, 2000 to First Union National Bank as Lender. (Incorporated by reference to Exhibit 10.27 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                              
|            | 
|4.26        |  | Schedule setting forth information on 14 substantially identical Assignments of Leases and Rents (with respect to Exhibit 4.18) dated as of
December 12, 2000 to First Union National Bank as Assignee. (Incorporated by reference to Exhibit 10.28 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                
|            | 
|4.27        |  | Schedule setting forth information on 14 substantially identical Consents and Agreements of Manager (with respect to Exhibit 4.19) dated as
of December 12, 2000 in favor of First Union National Bank. (Incorporated by reference to Exhibit 10.29 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                
|            | 
|4.28        |  | Schedule setting forth information on 14 substantially identical Environmental Indemnity Agreements (with respect to Exhibit 4.20) dated as
of December 12, 2000 in favor of First Union National Bank. (Incorporated by reference to Exhibit 10.30 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|4.29        |  | Schedule setting forth information on 14 substantially identical Receipt and Closing Certificates (with respect to Exhibit 4.21) dated
December 12, 2000 in favor of First Union National Bank. (Incorporated by reference to Exhibit 10.31 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                                                                                                               
|            | 
|4.30        |  | Promissory Note dated March 23, 2001 in the principal amount of $12,750,000 made payable by CRIT-VA II, Inc. to First Union National Bank,
with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                
|            | 
|4.31        |  | Indemnity and Guaranty Agreement dated as of March 23, 2001 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union
National Bank as Lender, in connection with a $12,750,000 loan to CRIT-VA II, Inc. as Borrower, with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K/A filed
April 13, 2001; SEC File No. 1-12875).
|            | 
|4.32        |  | Deed of Trust and Security Agreement dated as of March 23, 2001, from CRIT-VA II, Inc., as Grantor, to TRSTE, Inc. as Trustee for First
Union National Bank, the Beneficiary with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                              
|            | 
|4.33        |  | Assignment of Warranties and Other Contract Rights dated as of March 23, 2001 from CRIT-VA II, Inc. as Borrower to First Union National
Bank as Lender with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                    
|            | 
|4.34        |  | Assignment of Leases and Rents dated as of March 23, 2001 by CRIT-VA II, Inc. as Assignor in favor of First Union National Bank as Assignee
with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                               
|            | 
|4.35        |  | Consent and Agreement of Manager dated as of March 23, 2001 by CRIT-VA II, Inc. as Borrower in favor of First Union National Bank as Lender
with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                               
|            | 
|4.36        |  | Environmental Indemnity Agreement dated as of March 23, 2001 by CRIT-VA II, Inc. and Cornerstone Realty Income Trust, Inc., as Indemnitors,
in favor of First Union National Bank, as Lender, with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.7 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No.
1-12875).                                             
|            | 
|4.37        |  | Receipt and Closing Certificate dated March 23, 2001 by CRIT-VA II, Inc. as Borrower and Cornerstone Realty Income Trust, Inc. as Guarantor
in favor of First Union National Bank, as Lender, with respect to the Greenbrier Apartments in Fredericksburg, Virginia. (Incorporated by reference to Exhibit 4.8 to Current Report on Form 8-K/A filed April 13, 2001; SEC File
No. 1-12875).                                             
|            | 
|4.38        |  | Schedule setting forth information on six substantially identical promissory notes (with respect to Exhibit 4.30) dated March 23, 2001
in various principal amounts made payable to the order of First Union National Bank. (Incorporated by reference to Exhibit 4.9 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                      
|            | 
|4.39        |  | Schedule setting forth information on six substantially identical Indemnity and Guaranty Agreements (with respect to Exhibit 4.31) dated as
of March 23, 2001 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union National Bank as Lender. (Incorporated by reference to Exhibit 4.10 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No.
1-12875).                                           



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 
|4.40        |  | Schedule setting forth information on six substantially identical Deeds of Trust (with respect to Exhibit 4.32) dated as of March 23,
2001 with First Union National Bank as Beneficiary. (Incorporated by reference to Exhibit 4.11 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                     
|            | 
|4.41        |  | Schedule setting forth information on six substantially identical Assignments of Warranties and Other Contract Rights (with respect to
Exhibit 4.33) dated as of March 23, 2001 to First Union National Bank as Lender. (Incorporated by reference to Exhibit 4.12 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                       
|            | 
|4.42        |  | Schedule setting forth information on six substantially identical Assignments of Leases and Rents (with respect to Exhibit 4.34) dated as
of March 23, 2001 to First Union National Bank as Assignee. (Incorporated by reference to Exhibit 4.13 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                         
|            | 
|4.43        |  | Schedule setting forth information on six substantially identical Consents and Agreements of Manager (with respect to Exhibit 4.35) dated
as of March 23, 2001 in favor of First Union National Bank. (Incorporated by reference to Exhibit 4.14 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                         
|            | 
|4.44        |  | Schedule setting forth information on six substantially identical Environmental Indemnity Agreements (with respect to Exhibit 4.36) dated
as of March 23, 2001 in favor of First Union National Bank. (Incorporated by reference to Exhibit 4.15 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                         
|            | 
|4.45        |  | Schedule setting forth information on six substantially identical Receipt and Closing Certificates (with respect to Exhibit 4.37) dated
March 23, 2001 in favor of First Union National Bank. (Incorporated by reference to Exhibit 4.16 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                                                                                                                 
|            | 
|4.46        |  | Multifamily Note dated April 4, 2001 in the principal amount of $15,680,000 made payable to ARCS Commercial Mortgage Co., L.P. by CAC III
Limited Partnership, with respect to Silverbrook I Apartments in Grand Prairie, Texas. (Incorporated by reference to Exhibit (b)(19) to Schedule TO/A (Amendment No. 1) filed April 11, 2001; SEC File No. 5-55813).                                                                        
|            | 
|4.47        |  | Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of April 4, 2001 from CAC III Limited
Partnership, as Grantor to trustee for ARCS Commercial Mortgage Co., L.P. with respect to the Silverbrook I Apartments in Grand Prairie, Texas. (Incorporated by reference to Exhibit (b)(20) to Schedule TO/A (Amendment No. 1) filed April 11, 2001;
SEC File No. 5-55813).                    
|            | 
|4.48        |  | Replacement Reserve and Security Agreement dated as of April 4, 2001 by and between CAC III Limited Partnership and ARCS Commercial
Mortgage Co., L.P. with respect to Silverbrook I Apartments in Grant Prairie, Texas. (Incorporated by reference to Exhibit (b)(21) to Schedule TO/A (Amendment No. 1) filed April 11, 2001; SEC File No. 5-55813).                                                                                
|            | 
|4.49        |  | Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of April 4, 2001 from ARCS
Commercial Mortgage Co., L.P. to Fannie Mae with respect to the Silverbrook I Apartments in Grand Prairie, Texas. (Incorporated by reference to Exhibit (b)(22) to Schedule TO/A (Amendment No. 1) filed April 11, 2001; SEC File
No. 5-55813).                                               
|            | 
|4.50        |  | Promissory Note dated June 20, 2001 in the principal amount of $11,100,000 made payable by CRIT-VA III, Inc. to First Union National Bank,
with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                                               
|            | 
|4.51        |  | Indemnity and Guaranty Agreement dated as of June 20, 2001 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union
National Bank as Lender, in connection with a $11,100,000 loan to CRIT-VA III, Inc. as Borrower with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K/A filed
August 30, 2001; SEC File No. 1-12875).



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|4.52        |  | Deed of Trust and Security Agreement dated as of June 20, 2001, from CRIT-VA III, Inc., as Grantor, to TRSTE, Inc. as Trustee for First
Union National Bank, the Beneficiary, with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                     
|            | 
|4.53        |  | Assignment of Warranties and Other Contract Rights dated as of June 20, 2001 from CRIT-VA III, Inc. as Borrower to First Union National
Bank as Lender with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                            
|            | 
|4.54        |  | Assignment of Leases and Rents dated as of June 20, 2001 by CRIT-VA III, Inc. as Assignor in favor of First Union National Bank as Assignee
with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                       
|            | 
|4.55        |  | Consent and Agreement of Manager dated as of June 20, 2001 by CRIT-VA III, Inc. as Borrower in favor of First Union National Bank as Lender
with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                       
|            | 
|4.56        |  | Environmental Indemnity Agreement dated as of June 20, 2001 by CRIT-VA III, Inc. and Cornerstone Realty Income Trust, Inc., as Indemnitors,
in favor of First Union National Bank as Lender with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.7 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No.
1-12875).       
|            | 
|4.57        |  | Receipt and Closing Certificate dated June 20, 2001 by CRIT-VA III, Inc. as Borrower and Cornerstone Realty Income Trust, Inc. as Guarantor
in favor of First Union National Bank as Lender with respect to the Tradewinds Apartments in Newport News, Virginia. (Incorporated by reference to Exhibit 4.8 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No.
1-12875).       
|            | 
|4.58        |  | Schedule setting forth information on seven substantially identical promissory notes (with respect to Exhibit 4.50) dated June 20, 2001 in
various principal amounts made payable to the order of First Union National Bank. (Incorporated by reference to Exhibit 4.9 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                           
|            | 
|4.59        |  | Schedule setting forth information on seven substantially identical Indemnity and Guaranty Agreements (with respect to Exhibit 4.51) dated
as of June 20, 2001 by Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First Union National Bank as Lender. (Incorporated by reference to Exhibit 4.10 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No.
1-12875).
|            | 
|4.60        |  | Schedule setting forth information on seven substantially identical Deeds of Trust (with respect to Exhibit 4.52) dated as of June 20, 2001
with First Union National Bank as Beneficiary. (Incorporated by reference to Exhibit 4.11 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                            
|            | 
|4.61        |  | Schedule setting forth information on seven substantially identical Assignments of Warranties and Other Contract Rights (with respect to
Exhibit 4.53) dated as of June 20, 2001 to First Union National Bank as Lender. (Incorporated by reference to Exhibit 4.12 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                              
|            | 
|4.62        |  | Schedule setting forth information on seven substantially identical Assignments of Leases and Rents (with respect to Exhibit 4.54) dated as
of June 20, 2001 to First Union National Bank as Assignee. (Incorporated by reference to Exhibit 4.13 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                                



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                       
|            | 
|4.63        |  | Schedule setting forth information on seven substantially identical Consents and Agreements of Manager (with respect to Exhibit 4.55) dated
as of June 20, 2001 in favor of First Union National Bank. (Incorporated by reference to Exhibit 4.14 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                   
|            | 
|4.64        |  | Schedule setting forth information on seven substantially identical Environmental Indemnity Agreements (with respect to Exhibit 4.56) dated
as of June 20, 2001 in favor of First Union National Bank. (Incorporated by reference to Exhibit 4.15 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                   
|            | 
|4.65        |  | Schedule setting forth information on seven substantially identical Receipt and Closing Certificates (with respect to Exhibit 4.57) dated
June 20, 2001 in favor of First Union National Bank. (Incorporated by reference to Exhibit 4.16 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                           
|            | 
|4.66        |  | Multifamily Note dated June 20, 2001, in the principal amount of $8,950,000 made payable to the ARCS Commercial Mortgage Co., L.P. by CAC
IV Limited Partnership with respect to the Burney Oaks Apartments in Arlington, Texas. (Incorporated by reference to Exhibit 4.17 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                         
|            | 
|4.67        |  | Multifamily Deed of Trust, Assignment of Rents and Security Agreement dated June 20, 2001, from CAC IV Limited Partnership, as Grantor, to
trustee for ARCS Commercial Mortgage Co., L.P. with respect to the Burney Oaks Apartments in Arlington, Texas. (Incorporated by reference to Exhibit 4.18 to Current Report on Form 8-K/A filed August 30, 2001; SEC File
No. 1-12875).
|            | 
|4.68        |  | Replacement Reserve and Security Agreement, dated June 20, 2001, by and between CAC IV Limited Partnership and ARCS Commercial Mortgage
Co., L.P. with respect to the Burney Oaks Apartments in Arlington, Texas. (Incorporated by reference to Exhibit 4.19 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                        
|            | 
|4.69        |  | Assignment of Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of June 20, 2001 from ARCS
Commercial Mortgage Co., L.P. to Fannie Mae with respect to the Burney Oaks Apartments in Arlington, Texas. (Incorporated by reference to Exhibit 4.20 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).      
|            | 
|4.70        |  | Form of Articles of Amendment designating Series B Convertible Preferred Shares. (Incorporated by reference to Exhibit 4.1 to Current
Report on Form 8-K filed February 26, 2003; SEC File No. 1-12875).                                                                                                                                                                          
|            | 
|10.1        |  | Agreement for Appointment of Transfer Agent and Registrar between Cornerstone Realty Income Trust, Inc. and First Union National Bank of
North Carolina (Incorporated by reference to Exhibit 10.19 to Annual Report on Form 10-K for the Year Ended December 31, 1994; SEC File No. 0-23954).                                                                                    
|            | 
|10.2        |  | Employment Agreement dated October 1, 2001 between Cornerstone Realty Income Trust, Inc. and Glade M. Knight. (Incorporated by reference to
Exhibit 10.6 to Annual Report on Form 10-K filed April 1, 2002; SEC File No. 1-12875).*                                                                                                                                               
|            | 
|10.3        |  | First Amendment to Employment Agreement between Cornerstone Realty Income Trust, Inc. and Glade M. Knight, dated September 21, 2004. (FILED
HEREWITH).*                                                                                                                                                                                                                           
|            | 
|10.4        |  | Amendment No. 2 dated February 8, 2005 to the Employment Agreement, dated October 1, 2001, amended effective September 21, 2004 between
Cornerstone Realty Income Trust, Inc. and Glade M. Knight. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed February 9, 2005; SEC File No. 1-12875).*                                                       
|            | 
|10.5        |  | Employment Agreement dated October 1, 2001 between Cornerstone Realty Income Trust, Inc. and Debra A. Jones. (Incorporated by reference to
Exhibit 10.7 to Annual Report on Form 10-K filed April 1, 2002; SEC File No. 1-12875).*                                                                                                                                                



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                       
|            | 
|10.6        |  | Employment Agreement dated October 1, 2001 between Cornerstone Realty Income Trust, Inc. and Stanley J. Olander, Jr. (Incorporated by
reference to Exhibit 10.8 to Annual Report on Form 10-K filed April 1, 2002; SEC File No. 1-12875).*                                                                                        
|            | 
|10.7        |  | First Amendment to Employment Agreement between Cornerstone Realty Income Trust, Inc. and Stanley J. Olander, Jr., dated September 21,
2004. (FILED HEREWITH).*                                                                                                                                                                   
|            | 
|10.8        |  | Amendment No. 2 dated February 8, 2005 to the Employment Agreement, dated October 1, 2001, amended effective September 21, 2004 between
Cornerstone Realty Income Trust, Inc. and Stanley J. Olander, Jr. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed February 9, 2005; SEC File No. 1-12875).*
|            | 
|10.9        |  | First Amendment to the 1992 Incentive Plan Nonstatutory Stock Option Agreement between Cornerstone Realty Income Trust, Inc. and Martin
Zuckerbrod. (Incorporated by reference to Exhibit 10.25 to Annual Report on Form 10-K filed March 30, 1998; SEC File No. 1-12875).*                                                       
|            | 
|10.10       |  | First Amendment to the 1992 Incentive Plan Nonstatutory Stock Option Agreement between Cornerstone Realty Income Trust, Inc. and Harry S.
Taubenfeld. (Incorporated by reference to Exhibit 10.26 to Annual Report on Form 10-K filed March 30, 1998; SEC File No. 1-12875).*                                                     
|            | 
|10.11       |  | Articles of Incorporation of Cornerstone Acquisition Company, as amended by Articles of Amendment thereto. (Incorporated by reference to
Exhibit 10.42 to Annual Report on Form 10-K filed March 27, 2000; SEC File No. 1-12875).                                                                                                 
|            | 
|10.12       |  | Bylaws of Cornerstone Acquisition Company. (Incorporated by reference to Exhibit 10.43 to Annual Report on Form 10-K filed March 27, 2000;
SEC File No. 1-12875).                                                                                                                                                                 
|            | 
|10.13       |  | Articles of Incorporation of CRIT-SC, Inc. (Incorporated by reference to Exhibit 10.44 to Annual Report on Form 10-K filed March 27, 2000;
SEC File No. 1-12875).                                                                                                                                                                 
|            | 
|10.14       |  | Bylaws of CRIT-SC, Inc. (Incorporated by reference to Exhibit 10.45 to Annual Report on Form 10-K filed March 27, 2000; SEC File No.
1-12875).                                                                                                                                                                                    
|            | 
|10.15       |  | Articles of Organization of CRIT-SC, LLC. (Incorporated by reference to Exhibit 10.46 to Annual Report on Form 10-K filed March 27, 2000;
SEC File No. 1-12875).                                                                                                                                                                  
|            | 
|10.16       |  | Operating Agreement of CRIT-SC, LLC. (Incorporated by reference to Exhibit 10.47 to Annual Report on Form 10-K filed March 27, 2000; SEC
File No. 1-12875).                                                                                                                                                                       
|            | 
|10.17       |  | Certificate of Limited Partnership of CRIT-Cornerstone Limited Partnership. (Incorporated by reference to Exhibit 10.48 to Annual Report on
Form 10-K filed March 27, 2000; SEC File No. 1-12875).                                                                                                                                
|            | 
|10.18       |  | Limited Partnership Agreement of CRIT-Cornerstone Limited Partnership. (Incorporated by reference to Exhibit 10.49 to Annual Report on Form
10-K filed March 27, 2000; SEC File No. 1-12875).                                                                                                                                     
|            | 
|10.19       |  | Stock Option Agreement dated July 23, 1999 between Glade M. Knight and Cornerstone Realty Income Trust, Inc. (Incorporated by reference to
Exhibit 10.50 to Annual Report on Form 10-K filed March 27, 2000; SEC File No. 1-12875).*                                                                                              
|            | 
|10.20       |  | Change in Control Agreement dated as of August 1, 2000 by and between Cornerstone Realty Income Trust, Inc. and Glade M. Knight.
(Incorporated by reference to Exhibit 10.48 to Annual Report on Form 10-K filed April 2, 2001; SEC File No. 1-12875).*                                                                           
|            | 
|10.21       |  | Amendment Number 1 dated February 8, 2005 to the Change in Control Agreement, dated August 1, 2000, between Cornerstone Realty Income
Trust, Inc. and Glade M. Knight. (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed February 9, 2005; SEC File No. 1-12875).*                                   



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                        
|            | 
|10.22       |  | Change in Control Agreement dated as of August 1, 2000 by and between Cornerstone Realty Income Trust, Inc. and S. J. Olander, Jr.
(Incorporated by reference to Exhibit 10.49 to Annual Report on Form 10-K filed April 2, 2001; SEC File No. 1-12875).*                                          
|            | 
|10.23       |  | Amendment Number 1 dated February 8, 2005 to the Change in Control Agreement, dated August 1, 2000, between Cornerstone Realty Income
Trust, Inc. and S. J. Olander, Jr. (Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed February 9, 2005; SEC File No. 1-12875).*  
|            | 
|10.24       |  | Change in Control Agreement dated as of August 1, 2000 by and between Cornerstone Realty Income Trust, Inc. and Debra A. Jones.
(Incorporated by reference to Exhibit 10.50 to Annual Report on Form 10-K filed April 2, 2001; SEC File No. 1-12875).*                                             
|            | 
|10.25       |  | Change in Control Agreement dated October 25, 2004 between Cornerstone Realty Income Trust, Inc. and David L. Carneal. (Incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed October 29, 2004; SEC File No. 1-12875).*                                                    
|            | 
|10.26       |  | Amendment Number 1 dated February 8, 2005 to the Change in Control Agreement, dated October 25, 2004, between Cornerstone Realty Income
Trust, Inc. and David L. Carneal (Incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed February 9, 2005; SEC File No. 1-12875).*  
|            | 
|10.27       |  | Change in Control Agreement dated October 25, 2004 between Cornerstone Realty Income Trust, Inc. and Gustav G. Remppies. (Incorporated by
reference to Exhibit 10.3 to Current Report on Form 8-K filed October 29, 2004; SEC File No. 1-12875).*                                                  
|            | 
|10.28       |  | Amendment Number 1 dated February 8, 2005 to the Change in Control Agreement, dated October 25, 2004, between Cornerstone Realty Income
Trust, Inc. and Gustav G. Remppies (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed February 9, 2005; SEC File No. 1-12875).*
|            | 
|10.29       |  | CRIT-VA, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 12, 2000;
SEC File No. 1-12875).                                                                                                                                  
|            | 
|10.30       |  | CRIT-VA, Inc. Bylaws. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K dated December 12, 2000; SEC File No.
1-12875).                                                                                                                                                     
|            | 
|10.31       |  | Property Management Agreement dated as of December 12, 2000 between CRIT-VA, Inc. as Owner and Cornerstone Realty Income Trust, Inc. as
Manager. (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K dated December 12, 2000; SEC File No. 1-12875).                          
|            | 
|10.32       |  | CRIT Special, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K dated December 12,
2000; SEC File No. 1-12875).                                                                                                                             
|            | 
|10.33       |  | CRIT Special, Inc. Bylaws. (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K dated December 12, 2000; SEC File
No. 1-12875).                                                                                                                                                
|            | 
|10.34       |  | CRIT-VA II, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A filed April 13,
2001; SEC File No. 1-12875).                                                                                                                                
|            | 
|10.35       |  | CRIT-VA II, Inc. Bylaws. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No.
1-12875).                                                                                                                                                   
|            | 
|10.36       |  | Property Management Agreement dated as of March 23, 2001 between CRIT-VA II, Inc. as Owner and Cornerstone Realty Income Trust, Inc. as
Manager. (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No. 1-12875).                           
|            | 
|10.37       |  | CRIT Special II, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K/A filed April 13,
2001; SEC File No. 1-12875).                                                                                                                           



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                
|            | 
|10.38       |  | CRIT Special II, Inc. Bylaws. (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K/A filed April 13, 2001; SEC File No.
1-12875).                                                                                                                                                                      
|            | 
|10.39       |  | CRIT-VA III, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K/A filed August 30,
2001; SEC File No. 1-12875).                                                                                                                                                      
|            | 
|10.40       |  | CRIT-VA III, Inc. Bylaws. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No.
1-12875).                                                                                                                                                                         
|            | 
|10.41       |  | Property Management Agreement dated as of June 20, 2001 between CRIT-VA III, Inc. as Owner and Cornerstone Realty Income Trust, Inc. as
Manager. (Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).                                                  
|            | 
|10.42       |  | CRIT Special III, Inc. Articles of Incorporation. (Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K/A filed August
30, 2001; SEC File No. 1-12875).                                                                                                                                                 
|            | 
|10.43       |  | CRIT Special III, Inc. Bylaws. (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K/A filed August 30, 2001; SEC File
No. 1-12875).                                                                                                                                                                    
|            | 
|10.44       |  | Real Estate Purchase and Sale Agreement dated as of June 8, 2001 between Principal Life Insurance Company f/k/a Principal Mutual Life
Insurance Company and Cornerstone Realty Income Trust, Inc. (Incorporated by reference to Exhibit 10.20 to Current Report on Form 8-K/A filed August 30, 2001; SEC File No. 1-12875).
|            | 
|10.45       |  | Agreement of Limited Partnership of Cornerstone NC Operating Limited Partnership dated as of September 30, 2001. (Incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K/A filed December 14, 2001; SEC File No. 1-12875).                                                                                
|            | 
|10.46       |  | Membership Interest Contribution Agreement with State Street, LLC and Schedules for Trinity Commons Apartments, LLC, St. Andrews Place
Apartments, LLC and Timber Crest Apartments, LLC. (Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K/A filed December 14, 2001; SEC File No. 1-12875).        
|            | 
|10.47       |  | Membership Interest Contribution Agreement with State Street, LLC and Schedules for St. Andrews Place II, LLC. (Incorporated by reference
to Exhibit 10.3 to Current Report on Form 8-K/A filed December 14, 2001; SEC File No. 1-12875).                                                                                  
|            | 
|10.48       |  | Membership Interest Contribution Agreement with State Street, LLC and Schedules for Trinity Commons II Apartments, LLC. (Incorporated by
reference to Exhibit 10.4 to Current Report on Form 8-K/A filed December 14, 2001; SEC File No. 1-12875).                                                                         
|            | 
|10.49       |  | Membership Interest Contribution Agreement with State Street I, LLC and Schedules for Autumn Park Apartments, LLC and Legacy Park
Apartments, LLC. (Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K/A filed December 14, 2001; SEC File No. 1-12875).                                              
|            | 
|10.50       |  | 1992 Non-Employee Directors Stock Option Plan Amended and Restated Effective July 1, 2002. (Incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q filed August 9, 2002; SEC File No. 1-12875).*                                                                                                       
|            | 
|10.51       |  | First Amendment to the Cornerstone Realty Income Trust, Inc. 1992 Non-Employee Directors Stock Option Plan Amended and Restated Effective
July 1, 2002. (Incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed August 9, 2004; SEC File No. 1-12875).*                                          
|            | 
|10.52       |  | 1992 Incentive Plan Amended and Restated Effective July 1, 2002. (Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form
10-Q filed August 9, 2002; SEC File No. 1-12875).*                                                                                                                                 
|            | 
|10.53       |  | First Amendment to the Cornerstone Realty Income Trust, Inc. 1992 Incentive Plan Amended and Restated Effective July 1, 2002. (Incorporated
by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q filed August 9; 2004 SEC File No. 1-12875)*                                                                      



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                            
|            | 
|10.54       |  | Employment Separation and Consulting Agreement dated as of March 31, 2004, between Debra A. Jones and Cornerstone Realty Income Trust, Inc.
(Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q Filed May 6, 2004; SEC File No. 1-12875).                      
|            | 
|10.55       |  | Cornerstone Realty Income Trust, Inc. Executive Severance Plan adopted as of October 25, 2004. (Incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed October 29, 2004; SEC File No. 1-12875).*                                                                
|            | 
|10.56       |  | Amendment dated February 8, 2005 to Cornerstone Realty Income Trust, Inc. Executive Severance Plan dated October 25, 2004. (Incorporated by
reference to Exhibit 10.8 to Current Report on Form 8-K filed February 9, 2005; SEC File No. 1-12875).*                                    
|            | 
|10.57       |  | Amendment dated February 8, 2005 to Cornerstone Realty Income Trust, Inc. Executive Severance Plan dated October 25, 2004. (Incorporated by
reference to Exhibit 10.9 to Current Report on Form 8-K filed February 9, 2005; SEC File No. 1-12875).*                                    
|            | 
|10.58       |  | Amendment No. 1 dated February 8, 2005 to Stock Option Agreement dated July 23, 1999 by and between Cornerstone Realty Income Trust, Inc.
and Glade M. Knight. (Incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K filed February 9, 2005; SEC File No. 1-12875).*
|            | 
|10.59       |  | Voting Agreement between Colonial Properties Trust and Glade M. Knight, dated October 25, 2004. (Incorporated by reference to Exhibit 10.4
to Current Report on Form 8-K filed October 29, 2004; SEC File No. 1-12875).                                                                
|            | 
|10.60       |  | Voting Agreement between Cornerstone Realty Income Trust, Inc. and Thomas H. Lowder dated October 25, 2004. (Incorporated by reference to
Exhibit 10.5 to Current Report on Form 8-K filed October 29, 2004; SEC File No. 1-12875).                                                    
|            | 
|10.61       |  | Performance Bonus Agreement, made as of February 25, 2005, between Cornerstone Realty Income Trust, Inc. and S.J. Olander, Jr. (FILED
HEREWITH).*                                                                                                                                      
|            | 
|10.62       |  | Performance Bonus Agreement, made as of December 16, 2004, between Cornerstone Realty Income Trust, Inc. and Gustav G. Remppies. (FILED
HEREWITH).*                                                                                                                                    
|            | 
|10.63       |  | Performance Bonus Agreement, made as of December 16, 2004, between Cornerstone Realty Income Trust, Inc. and David L. Carneal. (FILED
HEREWITH).*                                                                                                                                      
|            | 
|10.64       |  | Agreement Evidencing Waiver of Performance Bonus, made as of February 25, 2005, between Cornerstone Realty Income Trust, Inc. and Glade M.
Knight. (FILED HEREWITH).*                                                                                                                  
|            | 
|21          |  | Subsidiaries of Cornerstone Realty Income Trust, Inc. (FILED HEREWITH).                                                                                                                                                                                                                
|            | 
|23          |  | Consent of Ernst & Young LLP. (FILED HEREWITH).                                                                                                                                                                                                                                        
|            | 
|31.1        |  | Certification of the registrants Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (FILED
HEREWITH).                                                                                                                                                 
|            | 
|31.2        |  | Certification of the registrants Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (FILED
HEREWITH).                                                                                                                                                 
|            | 
|32.1        |  | Certification of the registrants Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (FILED HEREWITH).                                                                                                   
|            | 
|32.2        |  | Certification of the registrants Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Action of 2002. (FILED HEREWITH).                                                                                                

---

|* |  | This is a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



78